Philippines Agriculture Public Expenditures Review: With a special focus on the implications of the Mandanas Ruling for the agri-food system FEBRUARY 16, 2023 Co-funded by the European Union Philippines Agriculture Public Expenditures Review: With a special focus on the implications of the Mandanas Ruling for the agri-food system FEBRUARY 16. 2023 Co-funded by the European Union Standard Disclaimer © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages the dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org. Cover photo: Philippine Rural Development Project Sample credit for a non-WB image: © Ami Vitale / Panos Pictures. Used with the permission of Ami Vitale / Panos Pictures. Further permission is required for reuse. Sample credit for a WB image: © Curt Carnemark / World Bank. Further permission required for reuse. Cover design: Michelle Elinor Lomibao 1 Acknowledgments This report was produced by a multi-sectoral team from the World Bank Group, led by Eli Weiss and Anuja Kar, with the lead co-authors John Nash, Nora Oliveros, and Roehl Briones. The study team also included Kevin Cruz, Maria Theresa Quinones, Mio Takada, Jock Anderson, and Paula Beatrice Macandog. The report was prepared under the overall guidance of Dina Umali-Deininger, Ndiame Diop, Achim Fock, and Madhu Raghunath. Katrina Brandon, Megan Mayzelle and Lindsay Hartley-Backhouse edited the report, and Mildren Penales provided administrative and logistical support. We thank the peer reviewers Sergiy Zorya, Richard Record, Irina Klytchnikova, and Clarissa Crisostomo David and David Llorico Llorito for their very useful guidance. We also thank the Department of Agriculture (DA) and the Department of Budget and Management (DBM) for their excellent collaboration and input to the study. We especially thank the DA Office of Policy and Planning, the DA Office for Special Concerns and its Bureau of Agriculture and Fisheries Engineering, and the DA Office of Regional Field Operations for their extensive contributions. We would also like to express our appreciation to all the local government units (LGUs), focal points, and staff of the various agencies for contributing to this work, and other stakeholders from the public and private sector and academia for their constructive engagement and inputs. This document was produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union. Currency Equivalent Exchange rate effective as of June 8, 2022 Currency unit = Philippine Peso (₱) US$1.00 = 52.96 2 Acronyms and Abbreviations A&F Agriculture and Fisheries ACEF Agricultural Competitiveness Enhancement Fund ACPC Agricultural Credit Policy Council AFMA Agriculture and Fisheries Modernization Act AgPer Agriculture Sector Public Expenditure Review AgGDP Agricultural gross domestic product AMCFP Agro-Industry Modernization Credit and Financing Program ASF African swine fever BARMM Bangsamoro Autonomous Region in Muslim Mindanao BFAR Bureau of Fisheries and Aquatic Resources CAR Cordillera Autonomous Region CARP Comprehensive Agrarian Reform Program CLUPs Comprehensive Land-use Plans CSA Climate-smart agriculture DA Department of Agriculture DAR Department of Agrarian Reform DILG Department of the Interior and Local Government DTP Devolution transition plan F2C2 Farm and Fisheries Clustering and Consolidation Program FMRs Farm-to-market roads GAA General Appropriations Act GDP Gross domestic product GHGs Greenhouse gases GOCCs Government-owned and controlled corporations GVA Gross value added HLURB Housing and Land Use Regulatory Board IFPRI International Food Policy Research Institute IRR Implementing Rules and Regulations policy LGC Local Government Code LGUs Local government units M&E Monitoring and evaluation MFD Maximizing Finance for Development NCR National Capital Region NFA National Food Authority NIA National Irrigation Administration NMIS The National Meat Inspection Service 3 NTA National Tax Allocation O&M Operations and maintenance ODA One DA Agenda OECD Organization for Economic Co-operation and Development OSEC Office of the Secretary ₱ Philippine Peso PCAF Philippine Council for Agriculture and Fisheries PCC Philippine Competition Commission PDP Philippine Development Plan PFA Philippine Franchise Association PFM Public financial management PFIDA Fiber Industry Development Authority PFMAT Public financial management assessment tool PhilRice Philippine Rice Research Institute PSA Philippine Statistics Authority R&D Research and development RA 11203 Rice Liberalization Act RBM/RBMS Results-based management/Results-based management system RCEF Rice Competitiveness Enhancement Fund RFUs Regional field units RSSP Rice Self-Sufficiency Program SAFDZs Strategic Agriculture and Fisheries Development Zones SGLG Seal of Good Local Governance 4 Contents ACRONYMS AND ABBREVIATIONS ...................................................................................................................... 3 LIST OF TABLES............................................................................................................................................... 6 LIST OF FIGURES ............................................................................................................................................. 6 1. INTRODUCTION ..................................................................................................................................... 18 CONTEXT AND RATIONALE .............................................................................................................................18 UNDERLYING STRATEGIES ..............................................................................................................................21 2. ASSESSMENT OF SECTORAL PERFORMANCE AND STRATEGIC ORIENTATION............................................. 23 ECONOMIC PERFORMANCE OF THE OVERALL AGRICULTURAL SECTOR ...................................................................23 THE POLICY AND INSTITUTIONAL FRAMEWORK: DECENTRALIZATION .....................................................................28 3. LEVELS, COMPOSITION, AND SOURCES OF PUBLIC EXPENDITURES ON AGRICULTURE ............................... 33 NATIONAL GOVERNMENT ..............................................................................................................................33 LOCAL GOVERNMENT....................................................................................................................................40 REGIONAL DISTRIBUTION ............................................................................................................................... 43 DA BUDGET FRAMEWORK .............................................................................................................................49 DEVOLUTION 2022—2024, RESULTING FROM THE MANDANAS RULING..............................................................50 4. DISTRIBUTIONAL IMPACT ....................................................................................................................... 63 DISTRIBUTION AS A CRITERION FOR EVALUATING AGRICULTURAL PUBLIC EXPENDITURE ...........................................63 REGIONAL ALLOCATION .................................................................................................................................64 5. CONCLUSIONS AND RECOMMENDATIONS .............................................................................................. 69 CHALLENGE 1: CHANGING THE STRATEGIC FOCUS TO BETTER ALIGN EXPENDITURES WITH THE NEW THINKING ...........70 CHALLENGE 2: IMPROVING THE LOW EFFECTIVENESS OF CURRENT SPENDING AND PROVIDING THE BASIS FOR A HIGHER BUDGET ALLOCATION FOR AGRICULTURE .........................................................................................................76 CHALLENGE 3: DEALING WITH PUBLIC EXPENDITURE ISSUES ARISING FROM DEVOLUTION........................................81 APPENDIX A: A BRIEF HISTORY OF EARLIER AGRICULTURAL SERVICE DECENTRALIZATION EFFORTS .................. 86 APPENDIX B: CALCULATING THE PROPORTION OF GOVERNMENT BUDGET DEVOTED TO AGRICULTURE ............ 88 APPENDIX C: THE IMPORTANCE OF THE POLICY ENVIRONMENT....................................................................... 90 APPENDIX D: DEVOLUTION CASE STUDY ......................................................................................................... 93 5 List of Tables TABLE 1.1 GROWTH RATES OF AGRICULTURAL GVA BY SUBSECTOR, 2001–2021 (%) IN 2018 ..................................19 TABLE 2.1 GROWTH RATES OF AGRICULTURAL GVA BY SUBSECTOR, 2001–2021 (%), IN 2018 PRICES .......................24 TABLE 2.2 POVERTY INCIDENCE AMONG FARMERS AND FISHERFOLK, BY REGION, 2015 AND 2018 ..............................24 TABLE 2.3 MAGNITUDE OF POVERTY AMONG FARMERS AND FISHERFOLK, BY REGION, 2015 AND 2018 .......................25 TABLE 2.4 THE DA AGENDA KEY STRATEGIES .......................................................................................................31 TABLE 3.1 SELECTED AGRICULTURE COMMODITY SELF-SUFFICIENCY RATIO, 2015–2018 ...........................................34 TABLE 3.2 TOTAL DA BUDGET BY FUNDING OFFICE 2015–2019, IN ₱ MILLIONS ......................................................36 TABLE 3.3 ALLOCATION TO THE COMMODITY BANNER PROGRAMS, 2015–2019, IN ₱ MILLIONS ................................37 TABLE 3.4 NATIONAL RICE PROGRAM (INPUT SUBSIDY) 2015–2019, IN ₱ MILLIONS ................................................38 TABLE 3.5 OSEC BUDGET BY PROGRAMS, PROJECTS, AND SERVICES, IN ₱ MILLIONS ..................................................38 TABLE 3.6 FINANCIAL PERFORMANCE, 2019–2021, IN ₱ MILLIONS ........................................................................40 TABLE 3.7 GOVERNMENT ALLOCATIONS FOR AGRICULTURE TO LGUS, BY LGU LEVEL, IN ₱ BILLIONS ............................40 TABLE 3.8 LGU EXPENDITURE ALLOCATION BY SECTOR, 2015–2019, IN ₱ MILLIONS ................................................42 TABLE 3.9 DISTRIBUTION OF DA EXPENDITURE ALLOCATED TO REGIONS OUTSIDE THE NCR ........................................44 TABLE 3.10 MAGNITUDE OF POOR FARMERS AND FISHERFOLK, 2015 AND 2018, IN THOUSANDS ...............................45 TABLE 3.11 REGIONAL DA EXPENDITURE AS A PROPORTION OF AGRICULTURAL GVA, IN CURRENT PRICES (%) ..............46 TABLE 3.12 COMPARISON OF REGIONAL RANKING BASED ON DIFFERENT AGRICULTURAL INDICATORS, 2018.................48 TABLE 3.13 MULTIAGENCY AFMA COMPONENTS.................................................................................................49 TABLE 3.14 TOTAL A&F APPROPRIATIONS, 2015–2019, IN ₱ MILLIONS .................................................................50 TABLE 3.15 THE DEVOLVED AND POST-DEVOLVED FUNCTIONS AND SERVICES OF THE DA ...........................................51 TABLE 3.16 DA OSEC APPROPRIATIONS, 2021–2022, IN ₱ ..................................................................................52 TABLE 3.17 NATIONAL TAX ALLOCATION, 2020–2022, IN ₱ MILLIONS ...................................................................54 TABLE 4.1 REGIONAL DA EXPENDITURE AS A PROPORTION OF AGRICULTURAL GVA, IN CURRENT PRICES (%) ................64 TABLE 4.2 COMPARISON OF REGIONAL RANKING BASED ON DIFFERENT AGRICULTURAL INDICATORS, 2018...................67 TABLE 5.1 DA ALLOCATION FOR THE BANNER COMMODITY PROGRAMS ...................................................................72 List of Figures FIGURE 2.1 POVERTY AND MALNUTRITION INDICATORS, BY REGION (%) ..................................................................26 FIGURE 2.2 POLICY FRAMEWORK........................................................................................................................29 FIGURE 3.1 DA APPROPRIATION LEVELS IN ₱ BILLIONS, AND AS A RATIO TO AGRICULTURAL GVA (%) ..........................34 FIGURE 3.2 ALLOCATION OF NATIONAL GOVERNMENT EXPENDITURES FOR AGRICULTURE AND AGRARIAN REFORM, 2020– 2022, IN ₱ BILLIONS .................................................................................................................................35 FIGURE 3.3 DISTRIBUTION OF AGRICULTURAL GVA BY REGION, 2018 PRICES (%) .....................................................45 FIGURE 3.4 RATIO OF DA REGIONAL EXPENDITURE SHARES TO POVERTY SHARES, 2018 .............................................47 FIGURE 4.1 DISTRIBUTION OF CROP FARMERS BY ISLAND GROUP (%) ......................................................................65 FIGURE 4.2 THE RATIO OF DA REGIONAL ALLOCATION SHARES TO POVERTY SHARES, 2018 ........................................66 FIGURE 5.1 ACTUAL INTENSITY RATIOS AND ATTAINABLE INVESTMENT TARGETS ........................................................74 FIGURE 5.2 AGRICULTURE ORIENTATION INDEX (AOI) FOR GOVERNMENT EXPENDITURES ...........................................77 6 Abstract The recent positive policy directions embodied in the New Thinking and One DA agenda have not yet fully translated into a shift in public expenditure patterns in the Philippine agriculture sector. One result is that agricultural growth remains low, and poverty in rural areas, where farming remains the main source of income, has stayed high. Underinvestment in public goods in agriculture, vital for inclusive growth, also drives the lack of growth. The continued bias supporting rice production has come at the expense of other agricultural products. The situation could worsen with the ongoing devolution resulting from the Mandanas Ruling of the Supreme Court unless the shift in the agriculture budget from central government to local government units (LGUs) accompanies clear changes in expenditure policies. To take full advantage of the opportunities arising from the new strategic directions and to devolve more responsibilities to LGUs, agricultural public expenditure policies must deal with challenges in three dimensions. First is the challenge of aligning expenditures with the ambition of the New Thinking. There is a need to transition away from previous and current spending patterns focused on increasing self-sufficiency through commodity-based banner programs, especially rice, towards investments in improving the overall resilience, competitiveness, inclusiveness, and sustainability of the agriculture sector. There are three ways to achieve such improvements by (a) shifting from a single-commodity and production-based approach to a more holistic and area-based planning approach; (b) focusing more on programs that fund public goods that are currently under-funded, such as research, agriculture extension and innovation systems, market information systems, infrastructure, biosecurity systems and programs supporting climate smart agriculture (CSA); (c) providing more emphasis to programs intended to overcome barriers to collective action and economies of scale. The second challenge is improving the currently low effectiveness of public spending, which is one factor behind the relatively low agricultural share in the government’s overall budget. Improving effectiveness will require correcting the problems that lead to low budget disbursement rates and the institutional and procedural shortcomings that impede the government’s ability to monit or and evaluate outcomes and make evidence-based decisions. It will also require important changes in how the government supports farmers. The reliance on support instruments that are inefficient tools for improving farmers’ competitiveness and productivity needs to change, particularly government provision of subsidized fertilizer, machinery, and other inputs. During the transition period of the rice liberalization, when support to affected rice farmers is needed, the government could implement a short-term e- vouchers system. Such a system would grow the private sector in input markets and give farmers more flexibility in managing their production decisions compared to the current subsidies. In the medium to long term, the government could consider an even more efficient mechanism and decouple support payments, which do not depend on the types of commodities or inputs. The third challenge is successfully implementing the financial and functional devolution resulting from the Mandanas Ruling. In the 1990s, the effort to devolve agricultural services did not go smoothly and was largely reversed. To avoid a similar fate with the current effort and fully realize this transfer’s potential benefits, the government must carefully consider which functions to transfer and what capacity building will be necessary for LGUs to carry out newly transferred responsibilities successfully. There will also need to be some mechanism in place to ensure that spending decisions at the local level align with the national interest and strategies. 7 Executive Summary Executive Summary Background Recent agricultural policy changes by the government —including the One DA Agenda pursued by the Department of Agriculture (DA) based on the New Thinking for Agriculture introduced in 2019 —are positive developments that have the potential to reverse the agriculture sector’s recent stagnant performance. These policies have the potential to transform the sector if properly operationalized, implying spending decisions must fully and effectively reflect them, which until now has not been the case. The Rice Liberalization Act (RA 11203), which abolished the long-standing protective quantitative restrictions on rice imports, and replacing it with a significant tariff, is indicative of the true spirit of this strategic shift. The Mandanas Ruling could be transformational for local service delivery if managed properly . The favorable Supreme Court ruling on the Mandanas appeal requires the central government to increase the Internal Revenue Allotment (IRA)—the share of government tax revenue going to the local government units (LGUs)—starting in 2022. The IRA will increase by nearly 37.9 percent annually, though transfers will likely decline in subsequent years. Since it will share more revenue with the LGUs, the central government intends to devolve more responsibility for administering and funding projects and programs. Though such devolution presents an opportunity to make service delivery more client-driven and improve accountability, there remain significant risks if it is not well managed. This Philippines Agriculture Sector Public Expenditure Review (AgPER) aims to (a) help the government evaluate the direction of spending policies under the New Thinking strategy and (b) consider the best way forward in devolving agricultural services to LGUs as a result of the Supreme Court’s Mandanas Ruling. Main Findings Level and composition of spending on agriculture at the central level The overall budget share allocated to agriculture began a steady decline in 2016. By 2020, it was lower than most comparator countries relative to the size of agriculture in the economy. This review concludes that agriculture has fared poorly in the political melee of budget allocation, at least partly due to the perception that the spending of agricultural funds was ineffective. Of course, the DA proposes to raise the budgetary priority accorded to the sector in –Šƒ–‹‘ƒŽ‰”‹…—Ž–—”‡ƒ† ‹•Š‡”‹‡• ‘†‡”‹œƒ–‹‘ƒ† †—•–”‹ƒŽ‹œƒ–‹‘Žƒȋ  ȌʹͲʹͳǦʹͲ͵ͲǤDemonstrating that the budget devoted to agriculture delivers more impact per dollar would support this effort. The Department of Agriculture (DA) received the largest share —over 50 percent—of the total agricultural budget in 2021–22 and is the focus of this review, given its dominant share of the agricultural public expenditure. Other agencies receiving significant support include the government-owned and controlled corporations (GOCCs), led by the National Irrigation Administration (NIA) and National Food Authority (NFA), and the Department of Agrarian Reform (DAR). 8 Within the DA, the Office of the Secretary (OSEC) receives an average of 81 percent of the DA’s budget , with capital investments representing around 16 percent of the OSEC budget. These investments consist of projects funded from domestic sources and foreign borrowings or grants. Locally funded projects are short- and long-term initiatives crafted or identified by the DA, mainly serving selected LGUs. Some of these projects have lasted less than a year, while others became permanent features in the DA budget. Foreign-funded projects are investments requiring huge capital and longer implementation periods. This review identifies how spending patterns have evolved and examines whether they align with the DA’s current strategic directions and objectives and their efficacy. An important objective underpinning past agricultural spending policy was achieving high self-sufficiency in food products, especially rice, through the single commodity banner programs, and budget decisions reflected this. The budget allocation pattern is inconsistent with the New Thinking, yet it does not appear that it is being reallocated. For the banner programs overall, the budget allocations for 2021 and 2022 were more than 50 percent higher than for 2019 and 2020. In the 2022 budget, the banner programs accounted for about 38 percent of the DA’s budget, compared to 27 percent in 2020. M ost of this was a huge increase in the rice budget. However, even after subtracting out the rice allocation, the banner programs’ budget increased by 23 percent from 2020 to 2022, from ₱ 8.7 billion to ₱10.7 billion, indicating the reorientation of spending priorities has not yet begun. DA spending to support rice production—including subsidies, infrastructure, and agricultural services specifically aimed at palay production —is extremely high by any standard. While rice accounts for only around 20 percent of the agricultural sector’s production value, rice production spending amounted to 57 percent of the budget for banner programs or around 22 percent of the DA’s total budget in 2022. Support for rice extends beyond the DA budget and the National Rice Program. It includes irrigation development in rice-growing areas, a paddy procurement program under the NFA, the Rice Competitiveness Enhancement Fund (RCEF), and rice research through PhilRice. Rice producers have also benefited from high tariff barriers protecting them from import competition. However, this is changing with the rice tariffication, which eliminated quantitative restrictions on rice imports while leaving a tariff of 35 percent for imported rice from ASEAN countries and a higher tariff for other imports. Such expenditure has been manifestly ineffective in raising rice productivity. The Philippines lags behind regional neighbors and comparable countries, with relatively stagnant yield growth since the mid-2000s. We must ask why this public expenditure has not had a larger impact. First, as experience has demonstrated throughout the world, input subsidies are an inefficient way to raise productivity. In addition, fertilizer distribution procedures interact with the budgeting system in problematic ways. Budgets sometimes suffer delays, while in-kind distribution means the government must be involved in complicated bidding procedures with opportunities for slippage or mistakes at several steps. Audits indicate that (a) some farmers do not receive the fertilizers they are registered to get, (b) delivery is too late, thereby hindering farmers’ ability to follow good management practices in fertilizer application, and (c) the products delivered do not meet farmers’ needs and are sometimes defective. The way subsidies are distributed also crowds out private sector investment in upstream activities. Furthermore, although subsidies raise beneficiaries’ incomes, they do so regressively since larger farmers who use more inputs receive more subsidies than smaller counterparts. 9 Level and composition of LGU spending on agriculture Financial incentives for qualified LGUs that meet the criteria for good governance are made available in the national budget and managed by the Department of the Interior and Local Government (DILG). The incentives allow LGUs to finance big-ticket projects they cannot accommodate under their respective budgets. Reports indicate that some LGUs were awarded incentives several times, while others, particularly the lower-income LGUs, could not meet the criteria. The agricultural allocation for LGUs increased over time in nominal terms but not as a share of LGU allocation. According to the most recent data, LGU spending on agriculture in 2018 was only ₱ 8.5 billion, a figure dwarfed by what the DA receives. Over the same period, agriculture’s share in the overall LGU appropriation from the central government shrank from 2.1 percent of the total in 2012 to 1.5 percent in 2018. The Devolution Transition Plan (DTP) developed by the DA to comply with Executive Order (EO) 138 did not specify the services for devolution but reiterated those devolved under the 1991 Local Government Code (LGC). These services were allocated a total budget of ₱ 37.1 billion in 2020. While this approximates the budget that LGUs should allocate to maintain current service activity levels, there are valid reasons to doubt that LGUs will allocate this spending level. No clear mechanisms exist to ensure that they will. As the DA moves forward with fine-tuning and operationalizing its DTP, it will need to cope with many issues, as did other countries such as Ghana, China, and Vietnam when they decentralized service delivery. Areas that need to be addressed for the process in the Philippines include: a) Need for improving coordination between the DA and LGUs in planning and delivering basic services.1 b) Improving results-based monitoring, evaluation, and reporting system at the LGU level. The lack of proper results-based monitoring, evaluation systems at the LGU level remains a concern.2 c) Enhancing financial and skilled workforce capacity for effective expenditure planning and management in many LGUs, especially in the lower income categories. The ability to follow budget rules, manage finances, or even assess their own capability for financial management using the Public Financial Management Assessment Tool (PFMAT) is often missing. d) The focus LGUs give to high-visibility expenditures with an immediate political payoff, meaning that rural and agricultural projects tend to get short-changed. This focus on high visibility seemingly occurred with extension services in some LGUs after the previous devolution phase and has also occurred in other countries. This limitation does not bode well for other services still to be devolved. Part of the problem is that some investments, such as farm-to-market roads (FMRs) and reducing greenhouse gases (GHGs), have significant positive externalities. That is, benefits accrue to the nation or the world, e.g., by integrating local markets into the national road network 1 The DA’s Province-led Agriculture and Fisheries Extension System (PAFES) is an important strategy to strengthen the collaboration between DA, LGUs, academe, and the private sector in delivering the extension services to the farmers and fisherfolks in relation to the Mandanas-Garcia ruling. In addition, the DA’s Bureau of Agricultural and Fisheries Engineering (BAFE) has issued guidelines and is carrying out consultations with the LGUs on functions and services. 2 The proposed installation of the Registration of Agricultural and Fishery Machinery and Equipment (RAFMES)at the LGU level under the AFMECH Law and the strengthening of the ABEMIS by the DA are positive developments. 10 or mitigating global warming. Local decision-making on how to allocate funds may not consider these benefits. e) The attitude of some LGUs exacerbates low budgetary priority for agriculture. Some LGUs continue to free ride on DA funding, knowing it has its own sizable funding, especially for commodity banner programs (Oliveros, 2021). These attitudes will need to change. Considering that this traditional division of labor between the central and local governments is entrenched, there may be considerable inertia, and changes may be gradual. f) The possibility of insufficient funding for LGUs even with the extra financing from the Mandanas Ruling. There is no well-functioning institutionalized mechanism to establish a direct correlation between the extra IRA allocation and the cost of providing the services that will be devolved. At least one study has concluded that the funding—around 16 percent—is likely insufficient for many LGUs to continue to provide devolved services at the same level as currently provided by the national government. LGUs’ heavy dependence on the IRA and their limited authority to raise revenue independently exacerbate funding problems. g) No good system exists for monitoring and enforcing compliance with the LG Us’ commitment, which they must make before construction begins, to maintain long-lived capital investments such as FMRs after construction. The absence of such a system is especially unfortunate since such maintenance neglect leads to much higher costs further down the road. Budget Process Issues The disbursement rate for the DA’s budget is low and does not seem to be increasing . Of the budget obligated and allocated, obligation rates across 2019–2021 have ranged between 85–92 percent. Of disbursements and obligations, disbursement rates have been only 75–77 percent, even disregarding the much lower rate in 2020, which may have been mainly due to COVID-19. This amount is lower than the disbursement rate for the whole national budget, which has been around 80 percent. For some important programs, the disbursement rate appears considerably lower, as revealed in the expenditure review of the Farm-to-Market Roads Program (World Bank 2021). The current review and a 2014 report by the Department of Budget and Management (DBM) suggest that funds were unused due to multiple problems. These included poor project selection, lack of prioritization, poor choice of project location, and failure of the LGUs to provide counterpart funding. Shortcomings of the agencies’ int ernal processes such as unrealistic cash programs, poor coordination between planning and budget and operations groups, procurement problems, processing of claims for payment, and other administrative issues also contributed to unused funds. The DA’s failure to spend the allocated funds undermines any argument for an increase in its budget during the budgeting process. Reforms in the early 2000s aimed at improving the budget process’ monitoring function and introducing results-based monitoring systems, yet 20 years on, the DA and other agencies are still struggling to implement and use this approach effectively3. The DA was one of the earliest departments to establish a results-based framework. Performance targets and indicators cover selected interventions that are not well correlated with the Agriculture and Fisheries Modernization Act (AFMA) objectives and outcomes. Each banner program tracks its own progress and has its own databases, with inadequate coordination among them. The DA must overhaul the system to monitor meaningful indicators of productivity, cost efficiency, farm profitability, and environmental sustainability, rather than focusing strongly on 3 Following the NAFMIP 2021-2030, the DA is geared toward improving its indicators and organizational framework including more fully making use of the principles of Results Based Monitoring and Evaluation. 11 production levels and arbitrary targets. Some indicators may require additional investments in data collection (surveys, baseline data collection, etc.), but such investments will pay off. One example of this is the ongoing effort to carry out a national machinery inventory/ census. In general, the DA must mainstream the systematic use of evidence-based economic cost-benefit analysis in budget decision- making. The DA recognizes the problem, and initial activities have already begun to address this issue, which the department hopes to accelerate. As part of this effort, the DA would like to carry out a new agricultural census, last carried out in 2012. The census would seem to be a worthwhile contribution to a comprehensive effort to enhance the monitoring and evaluation system. Distributional implications of agriculture public expenditures Current spending patterns are disproportionate to the size of the agricultural economy and the magnitude of poor farmers and fisherfolk. For most regions, the DA allocation is disproportionate to the size of the agricultural economy. For example, Luzon regions account for 48 percent of total agricultural Gross Value Added (GVA), compared with a total regional allocation to Luzon of 55 percent. The total share of the Mindanao region is 32 percent of the total agricultural GVA, whereas its total share in the DA budget is 26 percent. Moreover, the DA’s allocation is disproportionate to the magnitude of poor farmers and fisherfolk, with Visayas and Mindanao regions at a relative disadvantage. The DA allocates most of the budget to regions in the wealthiest of the three island groups, Luzon, with regions in the Mindanao Island group a distant second priority. The DA allocations for Visayas and Mindanao are lower than expected based regional rankings by poverty and size of agricultural output. To some extent, it is unsurprising that spending patterns would not be perfectly correlated with poverty since poverty alleviation is only one criterion on which to base decisions. It is of concern, however, that current policies inevitably lead to the distribution of a budget skewed to favor higher-income households and regions. The heavy spending on rice means that farmers and regions that grow it will receive the highest share of government spending, even though these are not the poorest, as noted above. Likewise, the instruments on which the banner programs rely, particularly subsidies for inputs, go predominantly to the larger farmers, so these farmers and the regions where large farms are most common tend to be favored by these policies. Addressing Three Major Challenges in Public Expenditure Policy Agricultural public expenditure policies will need to deal with challenges in three dimensions to take full advantage of the opportunities arising from the new strategic directions and the devolution of more responsibilities to LGUs. First, there is the challenge of aligning expenditures with the ambition of the New Thinking. Second, there is the challenge of improving the currently low effectiveness of public spending, which is one factor behind the relatively low funding for agriculture in the government’s overall budget. Third, there is the challenge of implementing financial and functional devolution that will result from the Mandanas Ruling. Challenge 1: Changing the strategic focus to better align expenditures with the New Thinking One key finding of this report is that public agricultural expenditures should align better with the ambition of the New Thinking. Public spending needs to reorient away from an objective of self- sufficiency in specific commodities and toward the New Thinking objectives of enhancing public expenditure quality and boosting the growth of the agricultural sector and incomes of farmers and fisherfolk. The DA plans to promote the shift from a single-commodity strategic focus to a transformative commodity-systems-based approach in the National Agriculture and Fisheries Modernization and Industrialization Plan (NAFMIP) 2021–2030. 12 Results will depend on how well this reorientation is operationalized in policy and spending decisions, which have not yet changed. Unfortunately, recent budgets do not reflect this new strategy. This review found that in contrast to the intentions, concrete spending decisions that would reflect new policy directions, such as reorienting production away from commodity-based programs, have not yet begun in earnest, especially for rice and other single commodity programs. The political economy of this kind of re-orientation is driven by the fact that the payoff for many of the most efficient investments (e.g., research, infrastructure) are long-term, making them less attractive for politicians with short horizons. Success in this strategy will require educating politicians of the benefits of these investments, and in particular demonstrating clearly that the budget is well spent through better evidence-based monitoring and evaluation. This review first recommends a transition in budgeting from a commodity-based planning mechanism to one more area-based, focusing on more holistic objectives rather than production targets. This correction would involve adopting bottom-up, area-based planning based on strategic agricultural zones focused on maximizing farm incomes for all producers, reducing poverty, and focusing on sustainability rather than maximizing production. The commodity systems-based approach advocated in the NAFMIP is an important step in this direction, especially when combined with a spatial framework such as the SAFDZ, as also advocated in NAFMIP. A second element to meet this challenge of better alignment is to focus more on programs that fund public goods that are currently under-funded. Increased public spending on initiatives driving public rather than private goods like subsidies has successfully improved the quality and impact of agricultural expenditure worldwide (Lopez and Gallinato 2007; Goyal and Nash 2013). Reducing subsidies would create budget space to ramp up spending on currently underfunded public goods such as research and development, agriculture extension and systems for innovation, market information, and biosecurity. Programs supporting CSA and climate-smart infrastructure, including the maintenance of FMRs, should also receive funding. Agricultural research is a classic public good, which yields high benefits by increasing productivity and raising incomes at very modest costs. Spending on research in the Philippines is very low—about ₱ 1,213 million in 2019, relative to an agricultural GDP of about ₱ 1,722 billion that year —and needs to be significantly enhanced in quantity and quality. Note that this figure does not include research spending falling outside the banner programs, data on which was unavailable to the mission. Developed countries with strong agricultural sectors, such as Australia, New Zealand, France, and the Netherlands, report investments in public agricultural R&D of 3–4 percent of AgGDP, often supplemented by strong private agricultural R&D investment. In a survey of research programs in Southeast Asia, a recent study by the Agricultural Science and Technology Institute concluded that the Philippines had a research intensity of 0.41 percent as of 2017. This figure placed the country in the middle among the Southeast Asian countries but far below best practice examples globally. The country had the greatest gap between actual and attainable investment in agricultural research among all these countries.4 Investments in improving extension services also offer big rewards, particularly those with strong public goods characteristics such as disease prevention and control, climate adaptation, or those with significant demonstration effects beyond the immediate beneficiaries . There have been major 4As measured by the difference between actual research intensity (public research expenditure/AgGDP) and potential attainable research intensity as estimated by ASTI. 13 developments in digital agriculture and new information and communication technologies and tools. Such developments have led to major agricultural extension and advisory service delivery improvements. New modes of communication between agents and farmers allow more efficient dissemination of information than the old face-to-face contact model. As extension services are increasingly decentralized, investments in technologies that help local extension staff reach a larger number of farmers should have high payoffs. One class of public goods that will require increased attention and budget is policies and programs to increase CSA through increasing the resilience of the agri-food system to weather shocks and reducing GHG emissions from the sector. Climate-related disasters are a significant threat to Philippine agriculture, and this threat is likely to be magnified over time by global warming related to GHG emissions. Philippine agriculture, particularly in the rice sector, contributes significant emissions, and the sector can do much more to increase its resilience to weather shocks. The following are some key CSA recommendations: a) Reform agricultural support policies to encourage more diversified production systems, which tend to be more resilient to climate shocks, while reducing support for rice, one of the biggest producers of GHGs. b) Improve water management and pricing policies to increase incentives for efficient use. This means curtailing both the provision of free irrigation and the use of non-volumetric water charges based on the area of land irrigated rather than water volume. c) Shift to E-vouchers5 as these encourage the over-use of nitrogen fertilizers, which produce nitrous oxide, a highly potent GHG with 265 times more global warming potential by volume than carbon dioxide. d) Use legal and regulatory reform to provide greater tenure security for farmers to encourage investments in more resilient, integrated, and diversified agriculture systems. e) Support information generation and dissemination to promote CSA technology adoption. Many innovative and longstanding production technologies are available, including a number for rice, such as alternate wet-dry production. Measures to promote the adoption of appropriate CSA techniques include increased investments in research on climate impacts and technologies for both adaptation and emission reductions. Measures also include enhancing systems to disseminate this information, for example, by strengthening linkages between PAGASA, the national weather service, and extension systems. f) Take advantage of the Mandanas process to build local capacity for mainstreaming CSA into policies and planning. This process should ensure inclusion in community planning since CSA solutions are only sustainable if there is strong community ownership (World Bank and BioCarbon Fund 2021). g) Subsidize adopting CSA production technologies where appropriate and use social safety nets for disaster relief where feasible, rather than setting up special programs. Decoupled direct payments are well suited to promoting climate-smart technology adoption and are designed for this in other countries. 5Due to the current geopolitical scenario on account of the Russia-Ukraine war, fertilizer prices have skyrocketed. This has led the DA to provide a temporary cushion to counter rising fertilizer prices through additional subsidies. 14 The third measure needed to improve budget alignment with the New Thinking objectives is to provide more funding to programs to overcome barriers to collective action and economies of scale 6. Funding would also include an increased focus on improving value chain coordination and integration under the Farm and Fisheries Clustering and Consolidation Program (F2C2) initiative, with government support for efforts to overcome market failure by supporting buyers and producer organizations in preparing and implementing profitable business plans. Measures to support collective action will also promote CSA investment options with high investment costs, e.g., solar-powered pumps, biodigesters, and small farm reservoirs, and therefore require joint action by groups of farmers. The Philippine Rural Development Project (PRDP) has already implemented such a model through its Enterprise Development Component. Challenge 2: Improving the low effectiveness of current spending In the short term, moving to an e-voucher system for input subsidies would give farmers more choices and incentives to develop better farm management skills and encourage private sector development in input supply. Currently, DA is using a voucher system for fertilizer distribution. However, farmers should be able to use the vouchers for a wide menu of options, including any inputs or farm services. Digital technologies are now substituting paper vouchers in other countries and provide several advantages; the Philippines should aim to use these wherever feasible. A voucher system would also help resolve the problems of delayed distribution noted above. In the medium to longer-term, input- and output-based support, including protection through high tariffs, could be replaced with a decoupled cash payment 7. Such a system would not depend on current input use, product choice, or production quantity. This mechanism can help support farmers’ incomes without creating biases that favor the production of any specific crop or favoring the negative effects of input subsidies. Decoupled payment schemes have played a key role in reform in the EU, USA, Turkey, Mexico, and other countries, where the form of payment has been per hectare. A decoupled payment system has numerous advantages: a) It is more controllable and WTO-friendly than support linked to inputs or outputs. b) It is more effective than vouchers at helping farmers develop farm management skills since it gives farmers more flexibility in choosing how to optimize their choices of production technology. c) It can incentivize farmers to make decisions on the environment, land management, public and animal health, or animal welfare, which prevent or minimize negative externalities. This incentivization is done successfully in several countries, including the US and EU. d) A decoupled payment system could be made progressive, with more limited payments per hectare for large farms. This improvement is also possible for vouchers. The government would have multiple options for handling the fiscal cost of this kind of reform . First, the net fiscal cost would be zero if decoupled payments were substituted peso per peso for existing subsidies. If decoupled payments can compensate for eliminating nontariff trade barriers, the government 6 For FY 2023, the DA is allocating P155.7M for activities supporting the F2C2 initiatives. 7 This would need to be proceeded by a thorough study and planning process, which is why it is recommended as a medium-term endeavor. The experiences of Mexico in implementing the PROCAMPO program and Turkey in its Direct Income Support system is worth studying. 15 has net fiscal costs. In this case, if tariffs are substituted for the NTBs as was done for rice, this additional revenue can be used to finance decoupled payments. Another option would be to use some of the fiscal savings from phasing out subsidies to finance decoupled payments and channel some of the savings to other forms of spending on public goods. Governments and institutions require procedural improvements . Getting the greatest value from public funds requires an efficient and effective process to plan and execute the budget and see how and where the government spends money. In this review, two areas particularly stood out as priorities for attention. Disbursement rates for the DA’s budget are lower than the average for the overall g overnment budget and do not seem to be increasing. The failure to spend the funds allocated to the DA greatly undercuts any argument for an increase in its budget during the budgeting process. A comprehensive review of the causes and potential cures for this problem is needed and its findings must be put into practice. Such a review is outside the scope of this study. The diagnostic section above cites findings from a 2014 DBM report on this problem and a review of the Farm-to-Market Road Program, which suffers from particularly low disbursement rates. The fact that low disbursement rates remain a problem suggests that the government has yet to take corrective actions, and this issue still requires priority attention. The review could begin by reexamining the findings of the previous reports, with the hope that its recommendations would be operationalized. Monitoring and evaluation mechanisms need to be enhanced and used more widely There are numerous shortcomings in the current systems and monitoring and evaluation (M&E) mechanisms. Enhanced M&E should be better institutionalized at three critical stages in the budget and planning. First, institutions should use economic cost-benefit analysis (CBA) to select projects and advise policymakers on the effects of proposed programs in the upstream planning stage, including financial and economic analysis. Second, during project execution, mechanisms for continuous monitoring should be in place, including feedback mechanisms to provide opportunities for adaptation in real-time. Finally, monitoring should include more extensive use of ex-post cost-benefit evaluations based on economic value to society. Lessons from the monitoring during implementation and the ex-post evaluations of projects and programs should feed back into the ex-ante cost-benefit analysis and design stage. The DA and the LGUs could also take further steps to improve processes for monitoring and evaluation . These would include (a) undertaking a diagnostic or assessment of the PFM system to identify weak areas for strengthening, (b) adopting a results-based approach as a framework for strengthening or installing a new PFM system In compliance with budgeting reforms and standards, (c) establishing or installing an integrated and automated PFM system with DA-wide connectivity and consistent with budgeting, accounting, and audit procedures and standards, and (d) complementing the PFM system with a capability-building program for officials and staff as identified by the DA and the LGUs. Challenge 3: Dealing with public expenditure issues arising from devolution The diagnostic section above described the findings of this review on the issues to address for successful devolution and how to take full advantage of the potential benefits. The following are recommendations to help address the challenges mentioned above: a) Given the current low capacity and motivation of LGUs to effectively carry out functions that may devolve to them, one good option moving forward may be to retain several of the functions of 16 the DA. Functions could include those requiring a critical mass of specially trained skilled staff, including project appraisal, monitoring, and impact evaluation. Functions retained would also include (as is currently planned) the continued development of the Agricultural and Biosystems Engineering Management Information System (ABEMIS) and other tools to support evidence- based decision-making at the top and to enable the ex-ante analysis of social and environmental impacts of projects and programs. Whatever institutional arrangements adjudicate the kinds of trade-offs and tensions arising from LGUs' lack of motivation to fund agricultural services adequately, the decisions need to be based on the best possible evidence on investment impacts. b) A monitoring and evaluation mechanism needs to be put in place to (a) systematically monitor each LGU’s spending on operations and maintenance (O&M), (b) evaluate whether that is adequate to maintain infrastructure in good condition, and (c) sanction LGUs that fall out of compliance. c) The capacity-building initiatives for the LGUs have to continue. The guidelines, manuals, and guidebooks developed must be simplified, updated, and disseminated to a wider number of LGUs, especially to the lower levels of government and those that have received but lost the expertise due to frequent staff turnover. Applying and using diagnostic tools to complement the capacity- building program must continue. The PFMAT and the Seal of Good Local Governance (SGLG), meant to measure PFM capacities and systems and incentivize LGUs respectively, are a perfect combination. d) The central government may want to consider mechanisms to influence the spending priorities of the LGUs. The review describes several options. 17 1 Introduction 1. Introduction Context and Rationale The Philippines has been among the most dynamic economies in the East Asia Pacific region over the past decade, driven by key structural reforms, leading to a significant reduction in poverty in recent years. Over the past decade, the country successfully pursued policies and reforms that accelerated economic growth and achieved more inclusive growth during relative political and macroeconomic stability. The result was that the Philippines' growth increased by an average of 6.4 percent per year from 2010 to 2019, a significant increase from the 4.6 percent average in the previous decade. The country’s economic performance surpassed that of its peers in the region, such as Vietnam (6.3 percent), Indonesia and Malaysia (5.4 percent), and Thailand (3.6 percent). As a result, the poverty incidence in the Philippines fell to 16.6 percent in 2018 from 23.3 percent in 2015. However, the Philippines had the worst contraction in its post-war history in 2020 (-9.5 percent) due to the triple shock of the COVID-19 pandemic, which delivered a historic global recession, a health crisis, and containment measures that stifled the domestic economy. The Philippines has since rebounded, growing by 5.7 percent in 2021, as the health situation supported an improving domestic economy, boosted by a more supportive external environment. The Philippines’ recovery continued strongly in 2022, as output surpassed its pre -pandemic levels in the first quarter of 2022. Agricultural policy has been unsuccessful in sparking dynamic development, even though the agriculture sector is important. While the overall economy has grown robustly, services and industry mainly drove economic growth. Agricultural growth was just 1.3 percent over that period. Total factor productivity (TFP) in agriculture has not been entirely stagnant —rising by about 32 percent over two decades—but this growth has been painfully slow compared to the TFP growth in regional neighbors such as Indonesia (50 percent), Thailand (67 percent), and Vietnam (73 percent). Overall, the sector has experienced a much slower pace of structural transformation compared to many regional peers. Many indicators point to this trend, including changes in average farm size, the pace of agricultural mechanization, absorbing surplus agricultural labor in the rest of the economy, changes in agricultural land use, developing institutions for collective action, and others. The recent changes in the old strategies and policy environment give reasons for optimism for the future of the sector. The One DA Agenda pursued by the Department of Agriculture (DA) is based on the New Thinking for Agriculture (see Box 1.1) introduced in 2019 and draws on lessons from past experiences. It centers on Four Pillars: Consolidation, Modernization, Industrialization, and Professionalization. The Farm and Fisheries Clustering and Consolidation Program (F2C2) is a major instrument for operationalizing this vision. This policy reorientation holds promise for transformational change that will produce a more resilient, inclusive, competitive, and environmentally sensitive sector. To be effective, however, the strategy will need to be fully reflected in spending decisions, which until now has not been the case. The Rice Liberalization Act (Republic Act [RA] 11203), which abolished the rice quota system—a long-standing instrument used to protect rice production—is indicative of this strategic shift. The Act opened up rice importation to private traders and limited the mandate of the National Food Authority to domestic procurement of palay, i.e., unhusked rice, from farmers and the maintenance of national rice stocks as an emergency safeguard. This reform was an important step toward leveling the playing field for non-rice agriculture. Possible evidence of its impact was that the share of high-value crops rose by 2.3 percentage points in 2019, and the biggest movement toward diversification occurred in rainfed areas. 18 Box 1.1. The New Thinking for Agriculture The New Thinking for Agriculture features eight paradigms for sectoral development and modernization: agricultural modernization, industrialization, export promotion, farm consolidation, roadmap development (strategy note), infrastructure development, higher budget and investments for the agriculture sector, and legislative support. Underpinning these eight paradigms are the Four Pillars of Transformation present in the Department of Agriculture’s (DA) agro-industrial strategy: Consolidation, Modernization, Industrialization, and Professionalization. This policy reorientation holds promise for transformational change that will produce a more resilient, inclusive, competitive, and environmentally sensitive sector. An initial step in this reorientation is the One DA Reform Agenda, comprising of 18 key strategies: (a) farm and fisheries clustering and consolidation, (b) collective action/cooperative development, (c) a province-led agriculture and fisheries extension system, (d) mobilization and empowerment of partners, (e) diversification, (f) credit support, (g) technology and innovation including digital agriculture, (h) farm mechanization and infrastructure investments, (i) climate change adaptations and mitigation measures, (j) food safety and regulations, (k) agri-industrial business corridors, (l) global trade, export development and promotion, (m) post-harvest processing, logistics and marketing support, (n) agriculture career system, (o) education and training: agribusiness management, (p) youth and women engagement, (q) ease of doing business and transparent procurement, and (r) strategic communication. There have been recent positive developments, but the overall performance is weak for several reasons. Problems are partially attributable to the external environment, including commodity price shocks, climate change, and the pandemic in recent years. Worldwide experience has demonstrated that a significant determinant of agricultural sector growth is the choices governments make regarding how to spend public funds supporting the sector, both in quantity and quality of expenditures (Table 1.1). Table 1.1 Growth Rates of Agricultural GVA by Subsector, 2001–2021 (%) in 2018 2001–10 2011–18 2019 2020 2021 Agriculture 3.5 2.1 1.2 -0.2 -0.3 Crops 2.3 1.1 -2.0 1.5 2.2 Livestock and poultry 4.2 4.1 5.5 -4.7 -8.1 Fisheries and aquaculture 7.0 1.0 2.5 -1.3 0.2 Note: GVA = Gross value added. Source: PSA The incoming government will want to consider how to increase the efficiency of public spending, service delivery, and sectoral programs, given these circumstances . The government approached the World Bank Group to undertake an Agriculture Sector Public Expenditure Review (AgPER) to support this effort. AgPERs have been an important tool in many countries worldwide to evaluate the adequacy, i.e., the volume and quality, of public expenditures in the sector and benchmark them against best practice and global comparators. This AgPER intends to help the government evaluate the direction of spending 19 policies under the New Thinking strategy and F2C2 programs and to help it think through the best way forward in devolving agricultural services to LGUs resulting from the Mandanas Ruling of the Supreme Court. This review intends to complement and take advantage of the findings in several other recent reports by the World Bank, including Transforming Philippine Agriculture: During COVID-19 and Beyond (2020), Realizing Scale in Smallholder-based Agriculture: Policy Options for the Philippines (2021), and The Mandanas Ruling and Potential Implications for the Farm-to-Market Road Development Program: A Public Expenditure Review (2021c). The Mandanas Ruling provided the impetus for the national government and local government units to revisit decentralization in the Philippines, which could transform agricultural service delivery. In April 2019, the Supreme Court confirmed its 2018 decision in favor of the petitions raised by governors Hermilando Mandanas and Enrique Garcia Jr. They contended that local governments have not received their fair share of national tax collections through the Internal Revenue Allotment system. 8 As a result, Internal Revenue Allotments are programmed in the 2022 national budget to increase by 37.9 percent, reaching ₱ 959 billion or 4.9 percent of GDP compared to 3.6 percent of GDP in 2021. The substantial increase in transfers has prompted the national government to rethink its approach towards decentralization by first reserving devolution service delivery mandates currently funded and executed at the national level. For local government units, the resource increase addresses one of the key binding constraints toward efficient service delivery. However, further strengthening decentralization will require collaboration between the national government, its agencies, and local government units to create an enabling environment for delivering meaningful decentralization. A study by the World Bank (2021a) suggests that the increase in IRA allocations to local governments in 2022 due to the Mandanas Ruling represents a significant risk to local development and service delivery if not managed properly. This analysis highlighted the main drivers of poor budget execution and its impact on local government spending. From a fiscal perspective, the main drivers of poor budget execution at the local level are (a) the size of the local government budgets and (b) the share of capital outlay in the budget, both of which are expected to increase significantly following the Mandanas Ruling. While the ruling partly addresses the resource challenges faced by local governments, it fails to address the four structural challenges which have constrained effective service delivery and led to an inefficient decentralization. Moreover, the Mandanas Ruling does not address issues related to vertical and horizontal fiscal imbalances that have significant equity implications in terms of overall socioeconomic development. This review aims to generate empirical evidence on the effectiveness and efficiency of public expenditures in the agriculture and fisheries sector9 and highlight best practices from global experience. To this end, the review covers various issues related to public spending on agriculture. The review starts by assessing the performance and strategic orientation of the agriculture sector (Chapter 2). It then considers the levels, composition, and sources of agriculture public expenditures (Chapter 3). We examine the planning, budgeting, monitoring, and evaluation of public expenditures on agriculture because they are important for improving the quality of public spending. Chapter 4 covers the distributional impacts of spending decisions. The final chapter summarizes and synthesizes the findings and recommendations of 8 The Mandanas Ruling mandates the inclusion of customs duties and several other national taxes in the computation of the IRA beginning in 2022. Tax revenues from the Bureau of Customs account for roughly 20 percent of total tax collections. 9 This report will refer to this as the ‘agriculture sector’, while recognizing that fisheries is an important part of the sector and is covered in the review. 20 the review in light of global experience, aiming to strengthen the government’s current programs and, in particular, the devolution process going forward. 10 Underlying Strategies Two strategies frame this review’s discussion of budget policies: diversificati on and coordination. This section briefly defines them and discusses their relevance to public expenditure policy. Diversification Diversification is justifiably one of the government’s explicit policy goals. Recommendations on using expenditure policies to support this objective play an important role in this review. In agriculture, diversifying income sources can be classified into on-farm and off-farm diversification. On-farm diversification takes place by adding more crops to the existing cropping system to improve the overall productivity of a farm or region’s farming economy or a shift from subsistence farming to high-value crops. It is the process through which rural households move their resources from a low-value mix of agricultural commodities to a mix of increasingly high-value commodities and products. Such a shift often involves activities in horticulture, dairy, poultry, and fisheries, although it sometimes includes producing high-quality staples such as specialty rice. In this transition, producers focus on more diverse intercropping and farming systems and products with higher-value end-uses. The expanded array of agricultural activities and products tends to create more employment and generate far more income per hectare and labor-day than producing common quality rice. Given the dominance of rice in Southeast Asian economies, this comparison is especially valid. Improved rural infrastructure and rapid technological change in agricultural production, particularly food production, have triggered the shift from producing a basic staple such as rice to a diversified market-oriented production system. The diversification of production is occurring alongside that of food demand patterns in expanding urban and overseas markets, mobilized by changing consumer demand and demographics.11 Diversification can also be a strategic response to potential threats, such as bad weather resulting from climate change, and price risks or policy changes. Off-farm or non-farm diversification entails farmers’ involveme nt in adding value to the existing cropping system through processing, packaging, branding, or other efforts to enhance product value . Promoting off-farm diversification involves a purposeful attempt to encourage involvement and investments in economic activities in segments of the value chain: (a) upstream, in research and development, certified seeds, high-value varieties, and farming systems, (b) midstream, in processing, and high-value end-uses and (c) downstream, in packaging, food safety, traceability, branding, and targeted markets. Finally, we can regard diversification as reallocating some of a farm’s productive resources to non-farming activities such as restaurants, hotels, and shops. 10 The scope of the AgPER is mainly the DA budget. It does not cover in-depth the budgets of other agencies that are important for the agricultural sector, in particular, the National Irrigation Agency and the Department of Agrarian Reform. 11 Diversifying diets and hence demand patterns is driven by Engel’s Law, which holds that the share of food in budget expenditures falls with higher incomes, and Bennet’s Law, which sees the share of starchy staples in the diet falling with higher incomes, with a corresponding rise in the consumption of fruits and vegetables, fish, and meat. 21 Coordination Both vertical and horizontal coordination help small-scale farmers to access markets and overcome the constraints they face individually by supporting collective action and reducing transaction costs. Coordination needs to be recognized in spending decisions and program designs, as in the F2C2 initiative. Horizontal coordination, particularly in the form of producer organizations, has many benefits when it is successful (USDA 1980). Producer organizations enable family farmers to increase their income by (a) negotiating to raise the general price level for products marketed and reduce the prices of supplies purchased, (b) reducing per-unit handling or processing costs by assembling large volumes, permitting economics of scale, and (c) developing new markets for products. Connecting farmers to markets is a major development challenge for small-scale producers who seek to compete in rapidly expanding modern agricultural value chains (World Bank 2016a). The first important step to reaching more lucrative markets is often horizontal coordination among small-scale producers to organize production and sell collectively. By pooling products of a specified grade or quality, many marketing cooperatives can meet the needs of large-scale buyers better than individual farmers. Cooperatives can also provide training and technical assistance to improve their members’ productivity, enabling farmers to own and control enterprises to procure supply and service inputs and market their outputs. In many instances, cooperatives foster local leadership development, while members become more self-reliant and informed citizens in their communities as they democratically participate in business decisions. These developments lead to stronger rural communities and help family farms stay in business. Notwithstanding its potential for generating benefits, cooperative development in practice has often had a disappointing track record for many reasons . Sometimes cooperatives are nationalized and become quasi-governmental bodies, often with a top-heavy hierarchical structure, and are used by politicians for political ends. Often cooperatives are set up with donor or government assistance on the premise—usually false—that ‘excessive’ margins within marketing channels provide scope for farmer members to capture some of that value. Consequently, cooperatives in many countries struggle even with support, only to experience major difficulties or collapse once that support is withdrawn (FAO 2007). Aside from horizontal coordination, producer organizations play an important role in vertical coordination by broadening their activities to increase the net returns to farmers and creating vertical alliances with buyers. When producer organizations vertically integrate activities along the value chain— from input supply or nurseries to marketing, processing, and logistics—they secure better prices and incomes for members and become more attractive to a wider number of producers. World Bank-financed projects, initially in Latin America and recently more globally, have used a productive alliance approach to encourage a vertical alliance between producer groups and at least one buyer to provide a good in a specific value chain through a commercial agreement. In this process, the public sector plays the role of the facilitator, bringing the parties together to define the ground rules. This market-driven approach helps the buyer source products of the requested quantity and quality and supports farmers to access markets and produce what the market demands, which is not always the case normally. 22 2 Assessment of Sectoral Performance and Strategic Orientation 2. Assessment of Sectoral Performance and Strategic Orientation Key messages Transforming agriculture in the Philippines into a dynamic, high-growth sector is essential, because of its contribution to improving the availability, diversity, and affordability of food and also because of its function in poverty reduction. Productivity growth and overall competitiveness have been and remain low. The DA’s responses to these challenges have taken different shapes and sizes over the years, resulting in some gains, some failures, and more challenges for the sector. The One DA Agenda pursued by DA is drawn from the lessons of past experiences, and if properly operationalized, can potentially transform the sector. It is based on the New Thinking, centered on the Four Pillars for transformation: Consolidation, Modernization, Industrialization and Professionalization. To be effective, however, the strategy will need to be fully reflected in spending decisions, which until now has not happened. Economic Performance of the Overall Agricultural Sector The agriculture sector weakened over the past decade following relatively robust growth between 2001–2010. The agriculture sector posted respectable growth between 2001–2010, averaging 3.5 percent annually (Table 2.1). Yet growth slowed to 1.7 percent between 2011–2020 due to a lack of investment, slower productivity growth, and vulnerability to climate disasters. The sector’s continued poor performance culminated in consecutive years of contraction in 2020, the height of the COVID-19 shock, and 2021. Agriculture’s different subsectors reflect its poor performance. The growth of crop production has increased, yet growth has been inconsistent. 12 Growth slowed in the 2010s and contracted in 2019, as a dry spell affected production in the first semester. The livestock and poultry sector went into free fall in 2020–2021, mainly due to African swine fever (ASF) destroying much of the hog industry. Lastly, fisheries and aquaculture managed to typically post positive growth until 2019, though within the subsector, capture fisheries were actually shrinking in the 2010s (Briones, 2022a). Clearly, the sector is undergoing considerable hardship, with farmers and private investors looking for public support funded out of the government’s budgetary appropriations. Climate-related disasters are reducing agricultural growth. Agriculture is significantly affected by climate shocks that damage crops, livestock, and rural infrastructure like irrigation canals, post-harvest facilities, and rural roads, and disrupt the logistics of agriculture products and supplies. Increasing temperatures affect crop and livestock yields, foster greater pest incidence, and reduce labor productivity. By 2050, estimates suggest that climate change will decrease agricultural productivity in the Philippines by 9 –21 percent (Pulhin and Tapia 2019). Increasing temperature and ocean acidification are also affecting 12Paddy rice is consistently the largest contributor to overall GVA, followed by livestock and other animals. Fishing and aquaculture are a distant third, followed by banana, corn, and coconut. Other major crops such as mango, pineapple, sugarcane, and cassava contribute 1–2 percent. The shares change only marginally over time. 23 fisheries’ productivity. Sea-based hazards like sea-level rise, storm surges, and saltwater intrusion will also significantly impact coastal and freshwater fisheries, particularly in the marginalized coastal communities of Visayas and Mindanao (Alliance of Bioversity International and CIAT and WFP 2021). These impacts, in turn, contribute to food deficits, increased food insecurity, and considerable social and economic disruption. Given the agricultural sector’s acute exposure, rural communities are especially at risk of negative consequences. Table 2.1 Growth Rates of Agricultural GVA by Subsector, 2001–2021 (%), in 2018 Prices 2001–10 2011–18 2019 2020 2021 Agriculture 3.5 2.1 1.2 -0.2 -0.3 Crops 2.3 1.1 -2.0 1.5 2.2 Livestock and poultry 4.2 4.1 5.5 -4.7 -8.1 Fisheries and aquaculture 7.0 1.0 2.5 -1.3 0.2 Note: GVA = Gross value added. Source: PSA Poverty among agricultural households Poverty within the agricultural population has dropped dramatically from 2015 to 2018 but remains relatively high among farmers and fisherfolk. The PSA provides estimates of poverty incidence (Table 2.2) among farmers and fisherfolk by region and the magnitude of poverty (Table 2.3). Several regions have no estimates of poverty by region as fishing is only a small part of the population’s livelihood, e.g., the Cordillera Autonomous Region (CAR) is landlocked. As per Table 2.2, poverty incidence among farmers is a little over 30 percent, while that of fisherfolk is somewhat lower at 26 percent. Note the steep drop in poverty incidence between 2015 and 2018, by 9.2 percentage points for farmers and 10.7 percentage points for fisherfolk. Over this period, there was a rapid ongoing structural transformation, characterized by a declining number of agricultural workers and rising agricultural wages, contributing to poverty decline (Briones 2017; World Bank 2018). Yet poverty reduction varies across regions; in percentage points, the fastest drop among farmers was in Northern Mindanao, followed by Southern Tagalog and the Bicol region. Yet no drop was recorded in Region II, while poverty in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM, formerly ARMM) even increased. Among fisherfolk, the steepest drop was also in Northern Mindanao, followed by the Bicol region, while poverty increased in the BARMM. Table 2.2 Poverty Incidence Among Farmers and Fisherfolk, by Region, 2015 and 2018 Farmers Fisherfolk 2015 2018 2015 2018 Philippines 40.8 31.6 36.9 26.2 CAR 36.8 20.4 - - Region I 21.1 10.8 33.8 - 24 Region II 21.3 21.3 - 15.0 Region III 27.1 13.8 26.8 15.3 Region IVA 29.0 13.2 28.0 16.4 Region IVB 30.8 20.7 24.5 14.7 Region V 48.9 34.2 51.7 28.9 Region VI 36.1 26.2 19.2 16.4 Region VII 45.7 34.7 36.2 18.7 Region VIII 52.3 42.5 44.8 30.5 Region IX 55.5 49.8 39.5 35.7 Region X 59.8 34.2 47.6 20.5 Region XI 31.8 28.4 44.1 21.8 Region XII 52.6 40.1 - 27.3 Caraga 52.6 40.7 48.6 28.6 BARMM 62.9 69.9 49.3 54.3 Source: PSA (2022). Table 2.3 Magnitude of Poverty Among Farmers and Fisherfolk, by Region, 2015 and 2018 Magnitude Shares Change (%) 2015 2018 2015 2018 Philippines 4,137 2,669 100.0 100.0 -35 CAR 121 58 2.9 2.2 -52 Region I 131 49 3.2 1.8 -62 Region II 165 138 4.0 5.2 -16 Region III 170 79 4.1 3.0 -54 Region IVA 175 61 4.2 2.3 -65 Region IVB 153 75 3.7 2.8 -51 Region V 371 199 9.0 7.4 -46 25 Magnitude Shares Change (%) 2015 2018 2015 2018 Region VI 369 192 8.9 7.2 -48 Region VII 341 199 8.2 7.4 -42 Region VIII 297 207 7.2 7.7 -30 Region IX 313 214 7.6 8.0 -32 Region X 364 196 8.8 7.4 -46 Region XI 212 154 5.1 5.8 -27 Region XII 379 275 9.2 10.3 -27 Caraga 142 123 3.4 4.6 -13 BARMM 424 445 10.2 16.7 5 Source: PSA (2022). Poverty and malnutrition among all households Agricultural poverty by region strongly correlates with overall regional poverty and regional malnutrition. In addition to poverty and social equity, the AFMA identified food security as a principle for agriculture and fisheries modernization. Malnutrition is a recognized indicator of food insecurity; Figure 2.1 shows poverty and malnutrition indicators by region. Figure 2.1 Poverty and Malnutrition Indicators, by Region (%) Sources: PSA (2022) for poverty incidence; PSA (2018) for stunting prevalence. 26 Poverty differs by region within the Philippines and links to agriculture. The lowest regional poverty levels, seen in Figure 2.1 on the left side of the horizontal axis, tend to be found in Luzon: the National Capital Region (NCR), Central Luzon, Southern Luzon, CAR, IV-B, and II. The highest poverty levels, seen on the right side of Figure 2.1, are in Visayas and Mindanao regions: Soccsksargen, Caraga, Eastern Visayas, Western Mindanao, and BARMM. There is a strong relationship between population poverty and farmer poverty; the correlation coefficient between the two with the NCR omitted is 0.93, which is approaching perfect correlation. Food and nutrition security Food and nutritional security in the Philippines mean that every person must have a daily diet that is safe, nutritious, and affordable and that comes from a vibrant, productive, and resilient food system. Food and nutrition security exist when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences for an active and healthy life. Food and nutrition security challenges in the Philippines fall into three main areas: energy deficiencies (hunger), micronutrient deficiencies (hidden hunger), excessive net energy intake, and unhealthy diets leading to obesity. Malnutrition imposes large human, economic, fiscal, and social costs . It contributes to maternal and child mortality, child stunting, poor learning capacity, lost adult productivity and income, high health costs, and slower economic growth. It also can perpetuate poverty in affected populations. Climate change may worsen nutritional status and health, especially in vulnerable groups, including women and children. Malnutrition is still widespread in the Philippines, and stunting remains an enduring challenge. The 2020 Annual Poverty Indicator Survey indicated that 66 percent and 75 percent of the total and poorest households, respectively, reported running out of food, going hungry, eating less than they should, or going without eating for a whole day. This deprivation was from a lack of money or resources in the 30 days preceding the survey. In 2018, the rate of stunting in children under five was 30.3 percent in the Philippines, equal to 4 million children. Figure 2.1 also shows the most recent data (2015) on regional stunting rates, an indicator of malnutrition. However, the alignment is far from perfect; the correlation coefficient between poverty and stunting is still high at 0.67 but much less than 1.0. The COVID-19 pandemic further aggravated food insecurity. The pandemic also coincided with the outbreak of African swine fever, which adversely impacted livelihoods and increased pork prices. Filipinos over-consume starchy staples and unhealthy sugary products and under-consume more nutritious foods such as proteins, vegetables, and fruit, because of limited availability, low incomes, lack of affordability, and poor choices. Consuming cereals, particularly rice, usually decreases as incomes increases in East Asia and the Pacific, but the Philippines is an exception. While social and cultural factors play a role in household diet composition, economic factors are key: it is expensive for Filipinos to diversify their diets and include more nutritious foods. In 2015, most Filipino households could afford a calorically adequate diet, but one-third could not afford a nutritionally adequate one (WFP 2018). Good nutrition is more expensive in urban areas; on average, urban consumers pay a premium of 10 percent for a nutritionally adequate diet compared to their rural counterparts. At the extreme, Metro Manila residents pay a 69 percent premium. The cost of a nutritious diet is also higher in the Philippines than in other countries in the region. 27 The Policy and Institutional Framework: Decentralization Framing agricultural service decentralization This Agricultural Public Expenditure Review includes a strategy to carry out the general plan to devolve more responsibilities and funding for agricultural services to LGUs as part of the gover nment’s response to the Mandanas Ruling. This effort is not the Philippines’ first attempt at large-scale decentralization of agricultural services.13 In the early 1990s, significant decentralization arose from the 1991 LGC, but this was not sustainable, and recentralization followed (World Bank 2004). Since then, there have been other smaller-scale efforts, including through the Philippines Rural Development Project, to transfer decision- making and implementation responsibilities to LGUs. These have shown great promise (World Bank 2021b), and lessons can be drawn from them which will be useful for the current nationwide process. Other countries have been implementing decentralization strategies, which can also offer lessons. One major objective of decentralization is to improve the relevance and responsiveness of services for the clients, that is, for the farmers and other stakeholders. The FAO (2006) has a useful diagram illustrating a causal chain of how closer links to stakeholders can lead to other beneficial effects that improve governance and eventually increase the willingness of beneficiaries or clients to pay for high- quality services. Closer connections with stakeholders at the local level can improve communication channels in both directions, with service providers getting improved direct feedback and a better understanding of client needs. Simultaneously, providers can communicate information more directly to their clients than in the current system. In principle, closer connection also automatically increases the accountability of providers. Where this kind of Paradigm of Decentralization works well, decentralization is likely to have considerable benefits.14 There are significant downside risks to devolving more responsibilities to the local level, including elite capture, externalities, and lack of economies of scale. In places where democratic decision-making processes work more poorly at the local than the national level, local power brokers may take control of the programs providing services and use them for their own benefit, known as elite capture. There are other tradeoffs and risks in decentralization as well. Some benefits and costs extend beyond the local level, and decision-making by local governmental units may not take account of the implications of their decisions outside their own area. An important example is that local farm roads will not have maximum benefits if they do not link up to a coherent national network. So, local decisions that do not consider these externalities may not be optimal for the whole country (World Bank 2021c). Some functions characterized by economies of scale cannot be performed adequately locally. For example, it is not efficient or affordable for every locality to maintain a good economic analytical unit for high-quality cost/benefit project analysis, monitoring, and evaluation. These activities should generally be considered steering functions that are best carried out or at least coordinated at the national level while maintaining strong linkages with local units. Other decentralization risks are that LGUs may not recognize the importance of agricultural services in general or specific types of services in the political melee of budget allocation and may lack decision- 13 The terms ‘devolution’ and ‘decentralization’ are sometimes used interchangeably. Here ‘devolution’ is reserved for when control and responsibility is delegated to local levels, so it is used as a category of decentralization, to be distinguished from ‘deconcentration’. 14 For examples of how this has worked in practice for extension services in several countries, including the Philippines, during the 1990s, see Bonal (undated, ca. 1999). 28 making capacity. In the Philippines and elsewhere, LGUs tend to skew spending towards social, educational, and health programs rather than programs providing public goods that improve agricultural productivity. This skew may be because national governments historically have been responsible for providing services without local-level funding, so there may be a perception that this is the ‘correct’ division of labor. The current plan to devolve funding and responsibility may help dispel this notion, although the change in perception may take some time. There may also be risks on whether the LGUs have sufficient capacity for making well-informed decisions and efficiently implementing programs. This issue is not unique to agricultural services, though it could be more serious for agriculture in areas where technical staff dealing with agricultural programs in the local bureaucracies are few or are not well trained. Figure 2.2 Policy Framework Source: FAO (2006). In designing decentralization strategies, the fundamental issue is maximizing the service provider- farmer interface and ensuring feedback loops while minimizing the risks mentioned above (Figure 2.2) . In selecting programs and responsibilities to devolve to LGUs, a good general strategy is to decentralize decision-making and implement services and activities at the lowest level at which the decisions will mainly affect that locality and where an adequate decision support system can exist. Decentralizing implementation does not necessarily require devolving decision-making, and in some circumstances, the optimal strategy may be to delegate only service production or delivery functions. For the delegated functions, whether related to decision-making or implementation, it will be critical to evaluate the LGUs’ capacity. Evaluation should be done before devolution and enhanced as needed. The government is evaluating the need for capacity building, and this review contributes to this process, although a comprehensive evaluation. Such an evaluation may need to be accompanied by a mechanism to provide incentives that encourage LGUs to allocate adequate funding to agriculture to ensure they fulfill their duty to provide high-quality services. Policies and programs that empower all farmers to demand high-quality and equitable services and to engage in participatory decision-making can mitigate the risk of local elite capture . The toolkit for all these policies will include expenditure programs, laws, and regulations. This review will consider these, drawing on experiences in other countries and in the Philippines’ devolution efforts (see Appendix A). 29 The Agricultural Competitiveness Enhancement Fund (ACEF) provided funding for credit to poor rice farmers struggling against the high cost of production inputs, equipment, and infrastructure. Yet the stringent criteria for eligibility and documentation requirements have defeated the purpose of the lending program, depriving farmers of derivative benefits. The subsidy program became the favored alternative as the ACEF began losing its financial relevance for farmers due to challenges in implementation. The recent Supreme Court Ruling on the Mandanas-Garcia Case favoring LGUs with additional National Tax Allocation (NTA, formerly IRA) compounds the vulnerabilities in the A&F sector. In 2018, the Supreme Court resolved that the allocated share of the revenue received by the LGUs from national taxes should include those collected from import duties and taxes and not be limited to internal revenue taxes. In 2022, the resolution will increase the revenue share received by the LGUs by about 37 percent, or ₱ 264 billion. The fiscal impact of the Mandanas Ruling on national government expenditures, combined with the COVID-19-driven reduction of tax revenues, has resulted in an ongoing process of devolving programs and projects funded and executed at the national level back to LGUs, in order to help protect the country’s narrowing fiscal space. The Mandanas Ruling provided the impetus for the national government and local government units to revisit decentralization in the Philippines. The substantial increase in transfers has prompted the national government to rethink its approach towards decentralization by first devolving service delivery mandates currently funded and executed at the national level. For local government units, the resource increase addresses one of the key binding constraints toward efficient service delivery. However, further strengthening decentralization will require collaboration between the national government, national government agencies, and local government units to create an enabling environment for delivering meaningful decentralization to its people. Executive Order (EO) 138 facilitates the full devolution that results from the Mandanas Ruling by facilitating the re-devolution of functions and services to local governments based on the LGC. The executive order instructs national government agencies to prepare devolution transition plans to ensure proper continuity in providing public goods and services at the local level. The transition plans would identify potential programs, projects, activities, services, and functions for devolution, including those that were recentralized and continued to be performed by government agencies. National government agencies will take on a more strategic role of overseeing and steering the sector and providing technical and capacity-building support to local government units. We expect the three-year transition period from 2022 to 2024 to provide sufficient time for national and local government levels to prepare. The new initiative has a greater chance of attaining its objectives with adequate preparation enriched by the lessons learned from the 1991 devolution, Devolving additional agriculture services under the Mandanas Ruling adds layers of complexities given the present state of the agriculture sector. Scaling down national government participation and investments that deliver devolved services may disrupt implementation in certain programs and services and affect how well the government can realize national goals and objectives under the Philippine Development Plan (PDP). The DA’s huge investments in providing the LGUs with financial support through its subsidy program have been identified as potential services to be devolved. The readiness and capacity of some LGUs to absorb additional services are longstanding challenges. Readiness equates to the capacity level, which is insufficient for some LGUs based on studies undertaken by the DILG and reinforced by World Bank (2021a). Many local government units, often smaller rural ones, are ill-equipped to assume devolved responsibilities. Local governments often lack the staffing and technical capacity to properly plan, prepare, implement, and monitor projects and services. This limitation 30 in capacity is reflected in underspent budgets as measured by the budget execution rate, undermining effective service delivery. A World Bank (2021a) analysis shows that local government units suffer from low budget execution, particularly in terms of capital outlays, which are likely to worsen after the Mandanas Ruling. Some LGUs participating in the AgPER focus group discussions (FGD) validated LGU capacity deficiencies. Representatives ranked strategic pla nning at the top of LGUs’ capacity-building needs, along with project development, budgeting, procurement, and monitoring. While local autonomy was promoted under the 1991 LGC, national and local governments have not yet figured out how to collaborate effectively. While LGUs will receive a higher IRA under the Mandanas Ruling, several LGUs will still face financial issues due to the imbalance in IRA sharing across subnational levels. High dependency on the IRA persists. The DA is currently pursuing a transformation program. The One DA Agenda (ODA) capitalizes on the Four Pillars of Transformation: Consolidation, Modernization, Industrialization, and Professionalization. These pillars are grounded in the agriculture policy enunciated under the 1987 Administrative Code 292 and the core principles for development promoted under the 1996 AFMA. Empowering farmers and fishers through collective actions and providing them the opportunity to partner with different stakeholders in the sector is expected to accelerate sectoral development. Seventeen identified key strategies (see Table 2.4) will fuel the transformation into what the DA calls a modernized, industrialized economic powerhouse. Farm clustering and consolidation are at the core of the strategy, aimed at attaining economies of scale and having farmers gain more value chain benefits by converging and integrating government interventions. Operationalizing most key strategies in the AFMA includes new, more effective, and multi-faceted groups of strategic activities and projects in partnership with the LGUs. In summary, the following actions will operationalize the key strategies: (a) bringing about economies of scale, (b) achieving better access to markets, financing, and investments for agriculture, livestock and fishery producers, and business ventures, (c) strengthening the contribution of farmers and fisherfolk to the national economy, and (d) accelerating agricultural growth and rural production. Table 2.4 The DA Agenda Key Strategies Key strategies Corresponding AFMA chapters Bayanihan agriculture clusters Chapter 1 Province-led extension system Chapter IX-X Collective action via cooperative development n/a Mobilization and empowerment of partners -do- Diversification -do- Technology and innovation, including digital agriculture Chapter VII Credit support Chapter III, Section 1 31 Farm mechanization and infrastructure investment Chapter VI, Section 1-15 Climate change adaptation and mitigation measures Chapter VII, Chapter II-2 Food safety and regulations Chapter VII Agriculture-industrial business corridors Chapter I Global trade, export development, and promotions Chapter V, Section 1, Chapter XII Post-harvest, processing, logistics, and marketing support Chapters V-VI Agriculture career system Chapter VIII Education and training, agriculture business management Chapter VIII Ease of doing business and transparent procurement n/a Strategic communication n/a Source: DA Note: n/a = Not available. Implementing the AFMA framework remains unfinished business for the DA. Pursuing ODA will likely suffer the same fate as the AFMA if current policies and strategies continue to dominate the sector. The ODA is yet to be fully integrated in the spending policy of the DA while t existing programs and strategies are likely to continue with the input subsidy under rice and other commodities. The way forward for the A&F sector will likely be influenced by fully implementing the ODA. The DA must learn from its past experiences, identify and reflect on its strengths and weaknesses and draw new, strategic, operational plans that are feasible, sustainable, equitable, and results oriented. There are institutional issues that the DA knows it should address articulated in the DA Devolution Transition Plan. Organizational structuring is inevitable, while a capacitation program must complement and enable the DA to deliver its mandated functions effectively. A review of the current budget framework is essential, and the budget must clearly demonstrate a link with the strategic plan. The DA must communicate the importance of these initiatives to convince the new leadership, oversight agencies, and other decision-makers to support the transformation program. 32 3 Levels, Composition, and Sources of Public Expenditures on Agriculture 3. Levels, Composition, and Sources of Public Expenditures on Agriculture Key messages Most funding for agriculture is allocated to DA, which leads and steers the sector’s development. The quantity and quality of spending depend on the funding decisions made by the DA. How these decisions are made and carried out affects the overall performance of both the sector and the DA. The following factors impact the DA’s performance and the sector in general: o Dominance of single-commodity programs, especially for rice, delivered through a direct subsidy scheme create imbalances in the allocation of funds, crowding out other spending options. o Underfunding for the DA steering functions and general underfunding of public goods, e.g., research, extension, and farm roads, negatively affect service delivery quality. o Inefficiencies in the PFM system contribute to delays in project implementation and underspending. Disbursement rates are low and have not appeared to improve in recent years. o Underfunding for regions with high poverty index and regions with high GVA affects farmers’ income and productivity. While systematic data on LGU spending is limited, it appears that in many LGUs, agriculture is accorded low priority in budgeting relative to other sectors. National Government Government expenditure on agriculture has declined over time. Of the total expenditure, agricultural spending is approximately seven percent of agricultural GVA in 2021. Current spending levels are close to the 2012–2013 level but still well below the ratio-to-GDP benchmark. In 2021, the ratio was only 3.4 percent of agricultural GVA. As a share in agricultural GVA at current prices, peaks in agricultural GVA reached 3.8 percent in 2009, and 4.3 percent after 2012 (Figure 3.1). The 2009 local peak occurred after the world rice price crisis of 2008, while the 2012–2013 peak was due to the large-scale implementation of a food staples sufficiency program (FSSP). The FSSP was effectively continuing the Rice Self Sufficiency Program due to multiple factors: rapid economic growth from 2010 onward, the resulting widening of the fiscal space, and the resolution to achieve rice self-sufficiency even several years after the rice price crisis. The link to fiscal space is also evident in Figure 3.2 during the trough years of 2003–2005, when spending collapsed to just 1.8–2.0 percent of agricultural GVA; these were years of fiscal crisis, and the situation improved only in 2005 when new fiscal measures stabilized government finances. Links to external shocks are evident in 2019–2020 when spending increased in response to the African swine fever and the COVID- 33 19 pandemic, viewed as a threat to the nation’s food security. As discussed in more detail in Chapter 5, agriculture’s share of the overall public budget, relative to its share of national GDP, has been declining since 2016. By 2020, it was lower than key international comparator countries. Figure 3.1 DA Appropriation Levels in ₱ Billions, and as a Ratio to Agricultural GVA (%) Sources: DBM (2022); PSA (2022). Note: GVA = Gross value added. Table 3.1 Selected Agriculture Commodity Self-Sufficiency Ratio, 2015–2018 Commodity 2015 2016 2017 2018 Rice 91.94 88.93 95.01 86.17 Corn 93.12 91.35 89.96 94.34 Coconut 100.01 100.02 100.04 100.01 Onion 96.10 84.48 47.65 84.61 Garlic 23.30 12.96 11.03 10.34 Sugarcane 100.0 100.0 100.0 100.0 Coffee 71.91 33.04 31.89 44.32 Calamansi 100.03 100.03 100.05 100.95 Source: Philippine Statistics Authority. Note: SSR = Domestic Consumption/Production + Import – Export. The DA accounts for the largest share of government expenditures on agriculture. The DA’s share is over 50 percent, followed by spending allocations to other government corporations, led by the NIA and NFA. Within the set of expenditures termed Economic Services, the Department of Budget and Management (DBM) classify the item Agriculture and Agrarian Reform under agricultural spending. Figure 3.1 34 summarizes data on this expenditure class. The agencies responsible for this spending line are the DA, DAR, and various GOCCs. The DAR receives only a small allocation, reaching at most 9 percent of agricultural spending, although the relative share has increased over time, up from just 4 percent in 2020. Among the GOCCs, the biggest allocations are for the NIA and NFA. The latter receives ₱ 7 billion annually to fund the government’s rice buffer stocking program. Several GOCCs receiving large budgetary support are attached to the DA, such as the aforementioned NFA and Philippine Rice Research Institute (PhilRice). There are indications that NIA will reattach to the DA. Lastly, note the large allocation for GOCCs in 2020, a temporary infusion mainly going to the NFA, Bases Conversion Development Authority, and PhilRice. The following analysis of agricultural expenditure focuses solely on the DA since it receives the biggest share, averaging over 50 percent of total agricultural spending in 2021 –22. The overall fiscal space and policy responses to external shocks impact allocations to the DA. The DA budget in nominal terms reached its peak in 2013 at almost ₱ 69 billion (Figure 3.1). Figure 3.2 presents the allocation of national government expenditures for agriculture and agrarian reform between 2020 and 2022. Figure 3.2 Allocation of National Government Expenditures for Agriculture and Agrarian Reform, 2020 – 2022, in ₱ billions Source: DBM (2022a). As a percentage share of the total budget, the DA budget declined from 2.6 percent in 2015 to 1.3 percent in 2019. It then increased slightly to 1.5 percent in 2020 and 2021. The percentage to GDP ratio remains flat at 0.3 percent. While several factors, including natural disasters, have led to fluctuations in the DA’s allocation, one important factor is the underperformance of the DA’s allocated budget. This underperformance is both a failure to spend the allocation and a failure to show on-the-ground results in the form of dynamic sectoral performance. 35 The DA budget allocation favors OSEC, which captures 80.6 percent of the DA budget (Table 3.2). OSEC directly supervises the main components of the AFMA. Its attached agencies receive a small share of the remaining 20 percent for supervising other commodity-based services, including regulatory and policy formulation. OSEC exercises both staff and line functions through the policy and regulatory bureaus while the regional offices deliver the front-line services, including coordination with the LGUs. The DA’s attached agencies exercise regulatory functions over commodities such as machinery, fiber, coconut, meat, and carabao. The Bureau of Fisheries and Aquatic Resources (BFAR) exercises both staff and line functions parallel with the functions of OSEC. The services under OSEC are grouped per the assigned responsibilities of the 11 undersecretaries, all directly reporting to the DA Secretary. Table 3.2 Total DA Budget by Funding Office 2015–2019, in ₱ Millions Agency 2015 2016 2017 2018 2019 Total % Share to total OSEC* 39,069 40,326 35,759 43,919 36,731 195,804 80.6 ACPC 2,036 43 811 1118 2,543 6,551 2.7 BFAR 5,986 6,703 6,990 6,092 5,758 31,529 13.0 NMIS 252 267 393 632 481 2,025 0.83 PCC 399 471 420 490 652 2,432 1.00 PFIDA 324 231 358 562 410 1,885 0.78 PCAF 166 168 182 180 202 898 0.37 PFA - - - - 206 206 0.08 PHILMEC 204 238 309 344 310 1,405 0.57 Total 48,436 48,447 45,222 53,337 47,293 242,735 - % to total budget ratio 2.6 2.3 1.8 1.9 1.3 - - % to GDP ratio 0.3 0.3 0.3 0.3 - - - Source: Annual General Appropriations Act 2015–2019. Note: * = Net of NIA budget. Commodity-based programs The DA budget composition reflects interventions under AFMA modernization and commodity-based programs. The banner commodity-based programs are the major components of the budget, under which AFMA interventions are managed and delivered to the farmers and fisherfolk through subsidies. The commodity programs account for 31–51 percent of the total DA budget for 2015–2019. The DA sees subsidies as a strategy to support LGUs in meeting devolution challenges and production targets under the Rice Self-Sufficiency Program (RSSP) and commodity programs. While the subsidy 36 policy seems to be the rationale, records show that sustainability and efficiency are perennial problems. Subsidy has become an annual feature and a major expense item in the DA budget for decades; it has been the subject of various adverse audit findings through the years (Table 3.3). The National Rice Program dominates the banner commodity programs, receiving a 47 percent share, of which 3–12 percent constitutes input subsidy. Table 3.3 shows that hybrid seeds account for the largest share. Table 3.4 shows the National Rice Program input subsidy 2015–2019. Table 3.3 Allocation to the Commodity Banner Programs, 2015–2019, in ₱ Millions 2015 2016 2017 2018 2019 Total % Share Commodity Rice 7,004 7,062 9,736 13,644 7,446 44,892 47.0 Corn 2,877 2,250 2,827 2,987 1,561 12,502 13.1 Livestock 1,236 1,173 1,538 1,601 1,179 6,727 7.1 High-value crops 2,199 2,919 3,967 3,054 1,546 13,685 14.3 Organic agriculture 541 636 818 804 546 3,345 3.5 Unallocated funds 2,227 2,485 4,093 3,294 2,168 14,267 15.0 Total commodity programs 16,084 16,525 22,979 25,384 14,446 95,418 100.0 Interventions Production support (farm inputs) 5,993 6,311 6,526 8,504 3,566 30,900 32.3 Market development 213 158 163 186 0 720 0,8 Extension services, education, training 2,268 2,081 3,179 3,247 3,639 14,414 15.1 Research and development 1,266 1,213 1,239 3,234 1,213 8,165 8.6 Provision of agricultural equipment and 4,117 4,277 7,779 6,919 3,860 26,952 28.2 facilities Other interventions 2,227 2,485 4,093 3,294 2,168 14,267 15.0 % Share to total DA budget 33.2% 34.1% 50.8% 47.6% 30.5% 39.3% Source: General Appropriations Act (GAA) Capital investments and performance 37 Providing facilities and other infrastructure under the AFMA happens when the LGUs provide an equity contribution of 10 percent in cash or kind. The AFMA defines FMRs as roads connecting production areas with markets and processing centers. FMRs link farms to businesses and markets in selected areas where the poverty index is high and farmers are RSBS-registered. Crafting a master plan is imperative, but it requires a budget, and it is time-consuming for the DA to prepare and coordinate with the LGUs. With their huge investment requirements, FMRs receive a large allocation in the DA budget, but foreign assistance also mobilizes considerable FMR funding. Capital investments represent around 16 percent of the OSEC budget. These investments consist of projects funded from domestic sources and foreign borrowings or grants (Table 3.5). Locally-funded projects are a mix of short and long-term projects crafted or repackaged primarily to serve selected LGUs. Some of these projects have lasted under a year, while others have become permanent features in the DA budget. Foreign-funded projects are investments requiring huge capital and longer implementation periods. Unlike locally-funded projects, foreign-funded projects like the PRDP undergo rigorous evaluation and scrutiny from oversight agencies, primarily concerning their financial implications on the expenditure and debt program of the Philippine government. Table 3.4 National Rice Program (Input Subsidy) 2015–2019, in ₱ Millions Item 2015 2016 2017 2018 Seed distribution 134 1,395 187 1,632 Hybrid 1,175 27 1,472 Certified seeds (procured) 134 220 160 160 Fertilizer 99 462 83 2 Inorganic 427 12 Foliar Soil Ameliorant 99 35 71 2 Total 233 1,856 270 1,634 % Share to rice budget 3.3 26.3 2.8 12.0 Total rice budget 7,004 7,062 9,736 13,644 Source: DA. Table 3.5 OSEC Budget by Programs, Projects, and Services, in ₱ Millions Classification 2015 2016 2017 2018 2019 Total General Administrative Support Services 858 1,209 1,833 1,606 1,278 6,784 (GASS) Support to Operations (STO) 1,403 1,222 840 3,142 4,378 10,985 38 Operations ● Policy 63 65 71 107 91 397 ● Technical and support services 11,218 12,125 15,153 16,622 10,932 66,060 ● Irrigation network services 1,511 1,371 3,339 2,685 2,000 10,906 ● FMR network services 150 154 59 10,018 10,313 20,694 ● Agricultural equipment and 2,941 2,921 4,487 4,281 1,914 16,544 facilities support services ● Regulatory services 273 786 1,028 977 917 3,980 Subtotal 16,156 17,422 24,137 34,690 26,167 118,581 Projects ● Locally-funded 13,069 11,365 6,754 1,109 1,789 34,085 ● Foreign-assisted 7,583 9,108 2,195 3,371 3,117 25,374 Subtotal 20652 20,473 8,949 4,480 4,906 59,459 Total OSEC appropriations 39,069 40,327 35,760 43,919 36,731 195,806 Source: General Appropriations Act. Due to the AFMA, the DA is one of the few agencies authorized to use its appropriations beyond one year until fully used, i.e., continuing appropriations. This flexibility allows the DA to extend procurement and optimize fund usage. Fund utilization is an indicator of performance. The reported financial performance of the DA has improved recently, based on obligations or levels of contracts closed and approved. Levels increased from 85 percent in 2019 to 92 percent in 2021. Yet disbursements show an average of 72 percent underspending, lower than the national average of 80 percent. Underspending generally indicates some inefficiencies in operations or contract implementation. Many contracts may be approved, but contracting delays slow downstream processes and hold up disbursements. Project implementation delays due to contractor’s inefficiencies, lack of documentation to support payments, and lack of equity arising from the defective selection of qualified LGUs for project implementation all contribute to low disbursements. Low disbursement reverses unspent money back to the treasury. To regain the funds requires reprogramming which takes longer processing time and approvals. Performance is a major criterion in budget distribution across all sectors and agencies of government (see Table 3.6). For many years, the DA’s inability to use its full budget has hindered its quest for a bigger slice of the budget pie. With the fiscal objective of reducing the deficit in the future, it becomes harder for any government agency to propose a bigger budget unless its programs align with the Philippine Development Plan priorities and budget thrust. While food security is a priority for the government, given fiscal constraints, the low financial performance dictates otherwise. 39 Table 3.6 Financial Performance, 2019–2021, in ₱ Millions Particular 2019 2020 2021 Allotment 56,926 84,648 69,950 Obligation 48,842 77,754 64,834 Disbursement 36,777 50,474 50,537 Obligation rate 85% 91% 92% Disbursement rate 75% 64% 77% Source: DBM. Note: *Obligation Rate = Obligation/Allotment, **Disbursement = Disbursement/Obligation. To convince oversight agencies that it needs a larger percentage of the budget, the DA has to improve program implementation strategies that identify and define relevant and detailed activities and inputs required, enabling it to allocate and utilize its available resources more efficiently. Consolidation and clustering, for instance, can enable the DA to achieve economies of scale. The AFMA introduced such a strategy through the Strategic Agriculture and Fisheries Development Zones (SAFDZs), which is an efficient basis for planning and policy formulation. It establishes strategic areas where value chains and support facilities can be available for A&F production. A shift to this strategy guarantees improving efficiency in allocating funds and achieving better performance. Local Government LGUs are assigned the task of delivering agricultural services to their constituents, but their spending allocation for agriculture is small relative to the DA and their overall allocation from the government. The foregoing discussion focused solely on national government spending; service delivery for agriculture has been assigned to LGUs by the 1991 LGC, which devolved agricultural functions from the DA to local governments. Table 3.7 presents Department of Finance-Bureau of Local Government Finance (DOF-BLGF) data on economic services, where the following items are classified as agricultural expenditure: demonstration/farm nurseries, extension and onsite research services, irrigation systems, the office of the provincial/city/municipal agriculturist, operating farm equipment pools, and quality control of agricultural products. Table 3.7 Government Allocations for Agriculture to LGUs, by LGU Level, in ₱ Billions Year Total City Municipality Province Agriculture as a agriculture share in total LGU allocation (%) 2009 5.3 0.79 3.04 1.53 - 2010 5.6 0.92 3.22 1.44 - 40 Year Total City Municipality Province Agriculture as a agriculture share in total LGU allocation (%) 2011 6.0 0.98 3.42 1.55 - 2012 6.2 0.93 3.57 1.69 2.1 2013 6.4 0.98 3.77 1.65 2.0 2014 6.7 1.15 3.83 1.74 2.0 2015 7.1 1.16 4.05 1.91 1.8 2016 7.4 1.30 4.36 1.76 1.6 2017 7.8 1.40 4.45 1.98 1.5 2018 8.5 1.65 4.71 2.16 1.5 Sources: DOF-BLGF for agriculture allocation; PSY (2019) for LGU allocations. Table 3.7 shows that the allocation has been increasing since 2009, a positive sign. By 2018, however, LGU spending on agriculture was only ₱ 8.5 billion, dwarfed by the annual allocation to the DA for agricultural development. The increase in government allocation over time is inconsistent with the overall LGU appropriation from the national government over the same period, which shrank from 2.1 percent of the total in 2012 to 1.5 percent in 2018. Such shrinkage suggests that LGUs prioritize local needs other than agriculture in their budgeting. It is also likely that the LGUs continue to exploit DA funding, especially for commodity banner programs (Oliveros, 2021), knowing the DA has a considerable budget. Across LGUs, most spending is done by municipalities, followed by provinces . Cities tend to be urbanized jurisdictions with a small agricultural base relative to municipalities, whereas provinces have fewer devolved key functions; however, the Agriculture and Fisheries Modernization Act (RA 8435) assigns provinces to serve as coordinators of the various municipal programs within an area. Devolving agricultural services in 1991 did not include matching funds, but the DA transferred some extension workers to the LGUs, thus transferring the necessary experience and skills in extension work. Together with staffing, the transfer included the turnover of some agricultural facilities. Over time, some LGUs abandoned these facilities due to a lack of funds for repair and maintenance, while some with extra resources continued using and maintaining them. This action enabled the DA to provide the intended services for the facilities, e.g., demo farms and dairy farms for onsite research and training. Local spending by sector reveals the skewed allocation pattern showing bias for the general services sector (Table 3.8). This spending includes administrative costs for salaries, the upkeep of government buildings, streets, and other public facilities, and recurring expenditures such as power, water, communication, security, garbage collection, and traffic management. 41 Table 3.8 LGU Expenditure Allocation by Sector, 2015–2019, in ₱ Millions Sector 2015 2016 2017 2018 2019 Municipalities ● General services 77,232 89,137 89,815 101,797 115,061 ● Economic 18,340 33,154 33,306 24,568 27,699 ● Social 21,814 29,915 30,812 30,835 34,778 Provinces ● General services 36,019 45,218 45,476 42,437 48,328 ● Economic 18,484 27,005 27,423 21,125 24,441 ● Social 22,205 32,951 32,587 29,426 33,455 Cities ● General services 66,826 89,430 92,448 85,911 96,045 ● Economic 21,863 38,222 42,310 26,850 30,099 ● Social 40,747 47,755 49,617 56,665 62,969 Summary General services 180,077 223,785 227,739 230,145 259,434 Economic 58,687 98,381 103,039 72,543 82,239 Social 84,766 110,621 113,016 116,926 131,202 Total 323,530 432,787 443,794 419,614 472,875 Source: DBM-Budget of Expenditures and Sources of financing (BESF). The economic sector ranks third in expenditure across all years, below the general and social services sector. This lower rank shows that the A&F sector competes with health and social services in terms of priority, as well as other subsectors, including public works, trade and industry, and the environment. Unsurprisingly, LGUs prioritize social welfare programs since they are closest to the grassroots and appropriately prepared for these services compared with the A&F sector. The biases became particularly prominent in 2019 when LGUs had to find additional funds during the COVID-19 pandemic. The FGD conducted with 17 LGUs validated biases, with the minimum allocation for A&F ranging from 0.1 to 3 percent of their respective budgets in 2021–2022. Even with the additional IRA, LGUs claim the increase is still inadequate to meet the costs of devolved services. 42 The Philippine government continued financial assistance and capability programs, limited to incentives subject to eligibility criteria and written guidelines through various circulars, administrative orders, and other issuances. Briefings on these guidelines are also made on a limited basis, meaning many LGUs are left to interpret the guidelines independently, causing confusion and nonuniformity of application. Self- assessment tools, e.g., a PFM assessment tool (PFMAT), are administered regularly for those LGUs introduced to the tool, but many have not used it. The oversight agencies introduced the PFMAT in 2014, and it requires updating to cover additional PFM dimensions. The LGUs which have undergone the PFMAT better appreciate the need for skills and expertise in PFM systems. Financial incentives are made available in the national budget and managed by the DILG for qualified LGUs that passed a set of criteria for good governance. The incentives allowed LGUs to finance big-ticket projects that their respective budgets could not accommodate. According to some reports, funding was awarded to some LGUs several times, some once or twice, while many LGUs, particularly the lower- income groups, cannot pass the criteria. Some limitations on the budget distribution are claimed to be restrictive and inconsistent with local autonomy but are adopted as a matter of policy . Limitations of 80 percent for personal services and maintenance and other operating expenses and 20 percent for local development funds are imposed on the local budget. By law, 20 percent of IRA transfers should go to local development projects, which are mostly capital investments. The 20 percent local development fund was menu-based, removed in 2020 and limited to projects on health and public works, and notably excluded A&F. This exclusion is perceived to have been due to support provided by the DA to LGUs. Regional Distribution Regional allocation of the DA budget Regions in Luzon receive most of the budget allocation, with the Mindanao Island group a distant second priority. The DBM classifies the overall appropriation to the DA into regions; however, this classification is not exhaustive, and the DBM analysis covers only 50–60 percent of the DA appropriation (Table 3.9). The remainder, attributed to the National Capital Region or ‘Central Office’, is either non - geographic in nature, such as policy and planning, or consists of allocations lodged within OSEC, distributed on a discretionary basis. The BARMM receives no allocation as the autonomous government in the region has its own agriculture program. The regional analysis remains a meaningful way to examine the geographic priorities of the DA, even if it has some problems. Table 3.9 shows that the regions receiving the largest allocations are in Luzon; the largest allocation consistently goes to Central Luzon (Region III), followed by Ilocos Region (Region I). The top five ranked regions are all in Luzon. Outside Luzon, the regions receiving the highest allocations are Western Visayas (Region VI), Soccsksargen (Region XII), and Eastern Visayas (Region VIII). Regional analysis of agricultural output The regions with the largest GVA are found throughout the archipelago, in Luzon, Visayas, and Mindanao. The top regions by agricultural GVA in 2020 are Central Luzon, Northern Mindanao, Davao Region, Southern Tagalog, and Western Visayas (Figure 3.3). Regions in Luzon account for 48 percent of total agricultural GVA, compared with a total regional allocation to Luzon of 55 percent. The total share of the Mindanao region is 32 percent of the total agricultural GVA, whereas its total share in the DA budget is 26 percent. We discuss the alignment of regional shares with agricultural GVA shares further below. 43 Table 3.9 Distribution of DA Expenditure Allocated to Regions Outside the NCR 2015 2016 2017 2018 2019 2020 2021 2022 Total for regions (₱ billions) 28.9 24.9 27.3 31.4 29.4 27.5 38.8 35.8 Shares in total (%) 58.9 51.5 60.3 58.0 59.1 48.4 58.5 49.7 CAR 4.8 10.5 11.3 5.5 6.5 5.0 4.1 5.6 Region I 7.0 4.6 5.1 7.7 7.1 6.9 7.6 9.6 Region II 7.6 12.2 12.8 10.1 7.7 8.0 12.8 13.0 Region III 10.5 3.2 6.1 14.0 12.1 12.5 14.9 15.5 Region IVA 5.7 2.5 5.9 5.4 6.9 8.3 6.3 5.7 Region IVB 5.5 6.9 7.5 5.4 5.3 6.2 5.9 8.5 Region V 6.3 7.3 6.3 8.4 7.8 8.4 7.9 7.7 Region VI 6.6 6.2 6.2 6.0 6.4 6.7 7.2 6.3 Region VII 5.6 6.7 6.0 5.2 5.1 6.3 5.7 3.5 Region VIII 6.8 5.8 5.2 5.4 5.5 5.6 5.3 4.5 Region IX 5.0 7.1 6.8 5.2 5.4 5.4 4.1 3.4 Region X 6.5 6.5 5.9 5.2 5.5 5.5 4.9 4.8 Region XI 5.7 10.1 7.1 5.9 7.8 4.7 4.1 3.5 Region XII 10.3 5.2 3.9 6.8 6.5 6.3 5.6 5.5 Caraga 6.0 5.2 3.9 4.0 4.4 4.5 3.6 2.8 BARMM - - - - - - - - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 DA expenditure shares (%) 58.9 51.5 60.3 58.0 59.1 58.5 49.7 Source: DBM (2015–2022). Note: NCR = National Capital Region. Separate regional budget not provided to the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). 44 Figure 3.3 Distribution of Agricultural GVA by Region, 2018 Prices (%) Source: PSA (2022). Note: GVA = Gross value added. Regional analysis of poor farmers and fisherfolk The PSA provides estimates of the magnitude of poor farmers and fisherfolk by region from 2015 to 2018. (Table 3.10). The regions with the poorest agricultural population are Mindanao and Visayas. In 2018, the regions with the largest number of poor farmers and fisherfolk were BARMM, Soccsksargen, the Zamboanga Peninsula, and Eastern Visayas; the regions with the lowest numbers were the Ilocos Region, CAR, and Southern Tagalog. Consistent with the drop in poverty incidence, the 2018 figures are much smaller than the figures for 2015, implying a massive drop in the absolute number of poor farmers over the period. Nationwide, the drop was 36 percent, with the largest declines registered in Region IVA, Region I, CAR, and Region IVB, all regions in Luzon. Outside Luzon, Central and Western Visayas and Northern Mindanao saw the largest declines. The one region in which the number of poor farmers and fisherfolk increased was the BARMM in Mindanao. Table 3.10 Magnitude of Poor Farmers and Fisherfolk, 2015 and 2018, in Thousands 2015 2018 Shares, 2018 (%) 2015–2018 change (%) CAR 120.7 58.4 2.2 -51.6 Region I 130.7 49.4 1.8 -62.2 Region II 164.5 138.4 5.2 -15.9 Region III 170.5 79.0 3.0 -53.7 Region IVA 174.7 61.2 2.3 -65.0 Region IVB 152.5 75.3 2.8 -50.6 45 Region V 371.4 198.8 7.4 -46.5 Region VI 369.3 191.7 7.2 -48.1 Region VII 340.8 198.7 7.4 -41.7 Region VIII 296.7 206.8 7.7 -30.3 Region IX 313.4 213.5 8.0 -31.9 Region X 364.2 196.4 7.4 -46.1 Region XI 212.1 154.4 5.8 -27.2 Region XII 378.8 275.4 10.3 -27.3 Caraga 141.5 122.7 4.6 -13.3 BARMM 424.0 444.8 16.7 4.9 Philippines 4,137.2 2,668.8 100.0 -35.5 Source: PSA (2022). Alignment of regional DA expenditure allocation with sector needs For most regions, the DA allocation is disproportionate to the size of the agricultural economy. As pointed out earlier, the DA budget’s regional allocation seemingly favors Luzon regions. However, compared with the size of the agricultural GVA, the regional allocation seems justified to some extent, as seen in the regional allocations as a ratio to agricultural GVA (Table 3.11). Allocations for Regions III and IV are less than the ratio of total regional allocation to total agricultural GVA of the selected regions. The most imbalanced allocations are for CAR and Caraga. Of 15 regions, ten have a ratio above the overall ratio of 2.0. Table 3.11 Regional DA Expenditure as a Proportion of Agricultural GVA, in Current Prices (%) 2015 2016 2017 2018 2019 2020 2021 CAR 5.2 9.9 11.4 6.0 7.1 5.1 5.2 Region I 2.1 1.2 1.4 2.2 2.0 1.7 2.1 Region II 2.2 3.2 3.3 3.0 2.2 2.0 2.2 Region III 1.3 0.4 0.7 1.6 1.5 1.4 1.3 Region IVA 1.3 0.5 1.1 1.1 1.3 1.4 1.3 Region IVB 2.7 3.0 3.3 2.5 2.4 2.7 2.7 46 2015 2016 2017 2018 2019 2020 2021 Region V 2.3 2.2 1.9 2.9 2.7 2.6 2.3 Region VI 1.4 1.2 1.1 1.2 1.3 1.2 1.4 Region VII 2.4 2.5 2.2 2.0 1.9 2.0 2.4 Region VIII 3.3 2.3 2.3 2.7 2.7 2.3 3.3 Region IX 2.3 2.8 2.7 2.2 2.1 2.0 2.3 Region X 1.3 1.1 1.0 0.9 0.9 0.8 1.3 Region XI 1.3 1.9 1.4 1.3 1.5 0.7 1.3 Region XII 2.6 1.2 0.9 1.7 1.5 1.3 2.6 Caraga 5.0 3.6 2.7 3.1 3.2 2.9 5.0 Total, selected regions 2.0 1.7 1.7 1.9 1.8 1.6 2.0 Sources: PSA (2022), DBM (2022). Note: GVA = Gross value added. The DA allocation is disproportionate to the magnitude of poor farmers and fisherfolk, with Visayas and Mindanao regions at a relative disadvantage. Figure 3.4 presents the ratio of share in total regional allocation to the share of total poor farmers and fisherfolk. The Luzon regions all have ratios above unity; the biggest ratio is for Central Luzon, i.e., its expenditure share is four times larger than what it should be if regional allocation were made according to the number of poor farmers and fisherfolk. Figure 3.4 Ratio of DA Regional Expenditure Shares to Poverty Shares, 2018 Source: DA. 47 The DA allocations for Visayas and Mindanao under prioritize regions with higher poverty and agricultural GVA based on a comparison of regional rankings. Table 3.12 displays the regions sorted in ascending order of expenditure allocation. Also shown are rankings of each region based on the number of poor farmers and fisherfolk and the size of agricultural GVA. For the poverty ranking, the table shows that the first-ranked province, Soccsksargen, receives only an eighth-ranked expenditure allocation; the second-ranked province, Zamboanga Peninsula, receives only a thirteenth-ranked expenditure allocation, and so on. The last row shows the mean absolute deviation between expenditure rank and alternative rankings; on average, the absolute difference in the ranking order based on expenditure and poverty is six positions. The mean absolute deviation is smaller for GVA rankings, at 3.9 positions. Hence, for instance, the expenditure allocation for Central Luzon matches its agricultural GVA ranking, both ranking first. Table 3.12 Comparison of Regional Ranking Based on Different Agricultural Indicators, 2018 Region Expenditure Poverty rank GVA rank rank III 1 11 1 II 2 9 8 I 3 15 7 V 4 4 9 IVB 5 12 13 VI 6 7 5 IVA 7 13 4 XII 8 1 6 VIII 9 3 12 VII 10 5 10 X 11 6 2 CAR 12 14 15 IX 13 2 11 XI 14 8 3 Caraga 15 10 14 Mean absolute deviation 0 6.0 3.9 48 DA Budget Framework The DA budget framework evolved from the impact of the 1991 devolution under the LGC and the thrust for modernization evidenced by the 1997 AFMA law. The multi-agency approach for the modernization program is captured in the DA annual budget through Special Provisions of the General Appropriations Act (GAA), indicating the specific budget attributed to AFMA under the respective budget jurisdiction of the agencies concerned (Table 3.13). Table 3.13 Multiagency AFMA Components Responsible agency AFMA components/function/service DPWH, DOTC, DA Technical assistance for agriculture-related facilities and other infrastructure, e.g., FMR, fishing ports and landings, food terminals, demonstration farms, laboratories, etc. DEPED-CHED Support for human resource development through education and training, e.g., curriculum for A&F courses DOST- PCAARRD, state universities, Support for research and development and extension services and colleges DEPED, TESDA Support for rural nonfarm development, e.g., job matching, scholarships DTI Trade and fiscal incentives DAR Agrarian reform and assistance for communities and beneficiaries, e.g., program beneficiary development, land use DENR Climate change and ecology NIA National irrigation systems NFA Market price support system, e.g., trading and importation, buffer stocking SRA Sugar regulation Source: DA-AFMA. Note: AFMA = Agriculture and Fisheries Modernization Act. See the acronyms list for additional definitions. The responsibility for promoting agricultural development lies with the DA. However, other national government agencies provide contributions, cooperation, and input on matters affecting the sector’s overall policies, plans, and programs. These interventions provide a total picture of the modernization program, captured in the DA and partner agencies’ annual budget (Table 3.14). The entire DA budget and the appropriated contribution of partner agencies are entirely attributed to the program, in agreement with the AFMA. The DA and NIA secured the majority of the AFMA budget at 54.08 percent and 30.97 percent, respectively, reflecting the key roles of the DA and NIA in achieving the sector’s food security and productivity development goals. In 2015–2019, the average annual AFMA budget was an estimated 3.6 percent of the total annual budget. In contrast, the percentage of GDP was almost flat at 0.6 percent and declined to 0.5 percent in 2019 as the budget shifted to social services during the COVID-19 pandemic. Financial and physical performance weighed down the allocation for the AFMA in recent years as the national government adopted performance as a criterion in the budget 49 distribution. The size of the national budget is a function of fiscal policy. The national government’s priority thrust and the agency's performance influence the budget’s distribution across agencies. Table 3.14 Total A&F Appropriations, 2015–2019, in ₱ Millions Agency 2015 2016 2017 2018 2019 Total % Share to total DA 48,436 48,447 45,222 53,336 47,293 242,734 54.08 NIA 26,000 32,000 27,000 28,000 26,000 139,000 30.97 CHED 21 21 21 21 18 102 0.02 DAR 1,401 1,942 3,893 3,838 1,940 13,014 2.90 DENR 150 150 150 150 145 745 0.16 DTI 76 77 77 100 111 441 0.09 FPA 0 76 108 129 0 313 0.06 NDA 0 168 200 520 271 1,159 0.25 NFA 0 0 5,100 7,000 7,000 19,100 4.25 NTA 0 0 0 346 401 747 0.17 PCA 2,288 990 1,424 1,471 1,251 7,424 1.65 PCIC 1,184 1,100 2,500 3,500 3,500 11,784 2.62 PFDA 0 288 225 398 765 1,676 0.37 PRRI 518 3,097 561 778 771 5,725 1.27 SRA 0 0 0 0 500 500 0.11 DPWH 0 1,798 1,411 1,000 100 4,309 0.96 Total 80,074 90,154 87,892 100,587 90,066 448,773 100 % to total budget 4.3 4.2 3.5 3.5 2.5 — — % to GDP 0.6 0.6 0.6 0.6 0.5 — — Source: Philippines GAA. Devolution 2022—2024, Resulting from the Mandanas Ruling Potential impact on DA expenditure The DA developed the Devolution Transition Plan (DTP) to comply with Executive Order 138. This Order did not specify the services for devolution but instead reiterated those services devolved under the 1991 LGC (Table 3.15). The technical support is a way for the DA to address funding inadequacy even with the increase in the NTA and the lack of expertise at the local level. FMR is the only item that can be potentially devolved. The items listed for devolution include a subsidy for farm inputs, equipment, and facilities for services devolved under the 1991 LGC. The budget for all these items amounts to ₱ 37 billion, based on the 2021 GAA. Under its DTP, the DA has indicated that it would continue aiding fifth and sixth-class LGUs. 50 Withdrawing funds for the devolved services will significantly reduce the DA budget and provide fiscal relief to the GOP but create further complications. Full devolution would streamline the DA's operations, but supporting devolution and capacity building in LGUs will likely occupy the DA. The transition will require fresh strategies and new interventions and delivery schemes in full partnership with the LGUs. The transformation program will roll out during the three-year devolution transition period. The DA’s partnership with the LGUs needs to change to provide better capacity to LGUs . The DA has to establish a platform for executing and sealing deals, yet regional offices are the likely front liners for monitoring and providing technical assistance to the LGUs. Regional field unit (RFU) staff will need capacity building to effectively advocate, communicate, train, and advise the LGUs. Building capacity is a major shift from the routine work of procuring, meeting with the LGU agricultural officers to understand farmer needs and facilitating the delivery of subsidies. For this, the DA must develop a capacity program suited to the services required. Annex D of the DA DTP identifies the areas of expertise needed for these initiatives. Complementing these initiatives is the need to review the organizational and staffing structure of the DA, which is a consequential effect of the devolution and addressed in Executive Order 138. The DA has undergone several organizational restructurings that focus on strengthening central supervision over the RFUs in delivering frontline services for each banner program. The setup consisted of multiple responsibilities and accountabilities under multiple supervision, ultimately affecting performance due to a lack of unity of command, imbalance, and inflexibility, which restricts the smooth flow of communication within and among offices concerned. With the functional shift, the DA must be able to align with new initiatives both under the transformation program and the full devolution. It may revisit, resize, consolidate, or redistribute functions and subfunctions if necessary. The objective is to transform the DA into a strong institution highly capable of steering the sector toward modernization and industrialization as envisioned under the One DA Agenda. Table 3.15 The Devolved and Post-Devolved Functions and Services of the DA Post-devolution DA functions/services Potential services for 2022 DA functions/services Devolution 1. Development planning Retained — 2. Policy formulation Retained — 3. Regulatory services Regulatory services for other A&F services, — e.g., pesticide and fertilizer Quality control and product standard and — safety, e.g., farm mechanization 4. Production support — Aquaculture Program-P1.2B — Subsidy for production inputs- P14.6B — Irrigation Network Service, small scale and communal irrigation —P6.9B — Subsidy for A&F equipment and facilities -P2.6B FMRs FMR- P11.7B 51 Post-devolution DA functions/services Potential services for 2022 DA functions/services Devolution 5. Research and Development and coordination of research — development activities 6. Credit facilitation Credit facilitation — 7. Extension services, Development of an extension service sub- — education and training system, techno demonstration, training, information dissemination 8. Information and Business information and trading services — marketing support It is essential to strengthen the DA’s mandated steering functions, long neglected in the budget. R&D ranks high in lowering production costs, improving productivity, and enhancing quality but is one of the least supported functions, receiving only 3.4 percent of the DA budget. Credit availability may not be an issue, but poor facilitation weakens farmer access, as experienced under the ACEF. Extension and training are in high demand but fall short of farmers’ expectations. Training must go beyond farm production and include agricultural business management to improve yield and income for the farmers. Regulatory services need more focus on protecting consumers, producers, and farmers. Shifting some of the budget resources to these functions is expected to contribute significantly to revitalizing the sector. Sustaining the annual rate of increase at the national budget level or an even higher rate of increase will boost the DA’s transformation campaign and the transition to full devolution (Table 3.16). The DA’s Budget for 2022 shows no significant changes, which posted a net decrease of 6.1 percent. Support to the LGUs and farmers accounts for 58.7 percent; funding for subsidies continues to cut a major share at 33.3 percent, declining at an average of 2.1 percent of the total OSEC budget. Table 3.16 DA OSEC Appropriations, 2021–2022, in ₱ Component 2021 2022 % Rate Increase/Decrease GAS 1,354,123 1,384,309 2.2 Support to operations 4,186,827 4,427,800 5.8 Operations ● Technical and production support 20,052,783 19,628,000 (2.1) ● Agriculture machinery, equipment, facilities, and 15,392,662 14,925,599 (3.0) other infrastructure A&F policy 77,037 74,295 (3.6) Regulatory 1,238,407 1,251,634 1.1 Locally- and foreign-funded projects 16,358,310 17,107,756 4.6 52 Total OSEC budget 58,660,149 58,799,468 0.24 Share to total DA budget 85% 91% — Total DA budget 68,622,033 64,463,822 (6.1) Source: GAA 2021–2022. Note: DA OSEC = Department of Agriculture, Office of the Secretary. The DA DTP15 outlines the devolution plan for the 2022 –2023 transition period. There are no new or additional services for devolution, but assistance to the LGUs for the devolved A&F services will continue. The plan thus subscribes to phasing the devolution and gradual withdrawal of assistance except for the fifth and sixth-class LGUs. The phased implementation plan depends on the LGUs’ readiness to perform the services. Readiness equates to the state and capacity level of the LGUs in terms of funding, availability of workforce, skills and expertise, and management systems that will enable the LGUs to carry out the devolved functions independently. To assist the LGUs, the DA has included a capacity program including sets of standards for service delivery and a standard organizational structure for the A&F sector. The DA DTP also includes a plan for DA organizational restructuring and staffing, including a capacity development program for DA officials and staff. Potential impact of devolution on local government expenditure The Devolution 2024 Transition Plan considers the additional NTA the LGUs started receiving in 2022 . The NTA has increased by 37.9 percent from 2021 to 2022 compared with only 7.2 percent from 2020 to 2021 (Table 3.17). Inequities in distribution persist, however, due to the inherent defect in the LGC formula for allocating IRA funds to municipalities, cities, and provinces. In particular, the current formula does not compensate for the varying levels of fiscal capacity across local government units, often worsening the horizontal imbalance among local government units at the same level (Manasan 2007; World Bank 2010). Moreover, the Internal Revenue Allotment fails to equalize the vertical discrepancies across different income classes and horizontal ones within the same income class, as it does not consider varying levels of poverty (World Bank 2016). These inefficiencies in the broad intergovernmental fiscal system hinder its main purpose of addressing inequalities across local governments comprehensively and systematically, constraining rural and poorer local government units from delivering adequate services. As a result, some LGUs have claimed to receive a ‘windfall’ while others receive ‘just enough’ to meet increasing demands. A World Bank (2021a) simulation shows that the increase in transfers to LGUs due to the Mandanas Ruling could lead to greater spending inefficiency and poor service delivery if concerns on absorptive capacity remain unaddressed. We expect local government spending to rise due to the Mandanas Ruling and the increase in local resources, although concerns regarding absorptive capacity and fiscal imbalances remain. Using a subnational fiscal database built on LGU level data from the Commission on Audit, the analysis shows that underspending by governments is likely to worsen post-Mandanas Ruling as many local governments cannot absorb a significant increase in revenues. Moreover, the analysis in this section 15 Annex A discussed unbundled assigned functions, services and facilities to each level of government; Annex B discussed implementation strategy and phasing of devolution transition activities; Annex C-1 provided, subject to resources and capacities of the LGUs, a compendium of service delivery standards; Annex C-2 suggested organizational structure and staffing at the LGU level; Annex D covered DA capacity Development Strategy; Annex E covered LGU capacity development Strategy; Annex F covered the Performance Monitoring and Assessment Framework; Annex G discussed the DA Rationalization Strategy. 53 applies to all types of local government units, as the results were robust to different local government types and capacities. The lack of local technical capacity perpetuates the dependence of local governments on the national government (World Bank 2016). Local government units, particularly smaller and rural local governments, are not equipped to assume the responsibilities mandated under the LGC. They lack the staffing and technical capacity to adequately plan, prepare, implement, and monitor service delivery. Local development plans are often created without adequate citizen participation and lack accountability to address local needs. Implementation often lacks transparency, resulting in citizens being uninformed about what is being provided and at what cost. This lack of information has led to a situation where national government agencies retain their responsibility over service delivery due to a lack of local capacity. Local government capacity does not improve because they continue depending on the national government. The AgPER Focus Group Discussions confirmed these issues, with varying degrees of intensity depending on the LGU. The LGUs interviewed have disclosed that the budget allocated for agriculture has barely increased from the 2021 allocation, allegedly due to budget inadequacy, based on the AgPER FGD. Yet this may not be true for other LGUs, which shared that allocating resources depends upon the priorities of the local leadership, especially that of the Local Chief Executive. Table 3.17 National Tax Allocation, 2020–2022, in ₱ Millions LGU No. of LGUs LGC-based sharing 2020 2021 2022 Provinces 82 23% 148,735 159,409 219,815 Municipalities 1,488 34% 220,633 236,468 326,074 Cities 146 23% 149,251 159,963 220,579 Barangay 41,931 20% 130,302 139,652 192,573 Total 648,921 695,492 959,041 Rate increase 7.2% 37.9% Source: DBM-BESF. Institutional framework and PFM systems Fragmented institutional arrangements characterize AFMA implementation. The AFMA promotes a holistic framework for modernization. With the DA leading the sector, each of the eight national government departments with its respective mandated functions contributes to a specific program component. How well the specific component can embed in their respective organizational structures depends upon the policy and priority of each department. The 11 DA attached offices and corporate entities each perform some commodity-based regulatory, policy, and steering functions. The bureaus and offices constituting the OSEC of the DA are responsible for crafting the Implementing Rules and Regulations (IRR) policy, the Agriculture and Fisheries Modernization Plan (AFMP), and the bigger components of the A&F value chain. Components include R&D, technology transfer, education, training credit, market development, and providing information support, facilities, and equipment for a modernized A&F sector. 54 Coordination is through committees, networks of organizations, and councils, all working in silos and only for selected components of AFMA . Some committees discontinued after meeting specific objectives; some remained because they were legally created. For instance, a Review Steering Committee was created to oversee and review the operating policies and procedures for the Agro-Industry Modernization Credit and Financing Program (AMCFP). The AMCFP has consolidated all directed credit programs of the DA and reviews the DA’s corporate arms and offices’ mandates, providing lending, insurance, and guarantees for the A&F credit programs. The National Marketing Umbrella Board of Directors and regional marketing umbrellas provide the policy and guidance for market-related activities. The National Agriculture and Fisheries Education System (NAFES) Committee, headed by the Commission on Higher Education (CHED), was created to prepare the NAFES plan. The plan included preparing curricula for A&F, creating a network of National Centers of Excellence, and evaluating the National Integrated Human Resource Development Plan. Executive Order 127 led to the creation of the Council for Extension, Research, and Development in Agriculture and Fisheries. OSEC issues guidelines to clarify policies, rules, and regulations. Policies represent the framework for setting rules, and regulations clarify what is permitted under each rule. The different heads of bureaus and program offices issue parallel complementary guidelines. At the regional level, RFUs coordinate all initiatives, programs, and projects with LGUs. In some instances, there are DA offices with a regional presence separate from the regional offices. These perform direct coordination with the LGUs and other stakeholders. The DA crafts the IRR and the AFMP; at the national level, these are the basis for developing the specific chapter on the A&F sector of the PDP. The AFMP contains broad strokes, but the action plan is developed at the department and office level of the organizational hierarchy or by councils and umbrella organizations. The respective component goals and objectives aid in developing each action plan, but these action plans are not always implemented because they are not synchronized with related plans. The CHED and TESDA produce graduates through agriculture training and courses, but the lack of opportunities in the sector hampers access to their services. For instance, the lack of infrastructure and facilities, which comes under another office in the DA, hinders technology transfer, the ATI’s responsibility. The criteria for prioritizing irrigation systems and similar infrastructure are reportedly reformulated. Whether the prioritization is in sync with the DA’s criteria on the production part of the value chain remains unknown. With the fragmented setup and disparate components of the AFMA, crafting a single, cohesive implementing framework to unify the action plan is essential to managing, coordinating, and consolidating the operational strategies and activities to attain a modernized A&F sector. Unfortunately, the single, cohesive framework is non-existent. Instead, the components of the AFMA are left competing for resources, encapsulated and buried within each agency’s department’s action plan. The DA has developed its own framework, but elements that allow for objective statements, measurable performance targets, and regularly monitored and reported progress are not yet in effect. A performance monitoring indicator system is reported to have been adopted across the regions but only by some attached agencies, indicating an incomplete and faulty monitoring system 16. The process that crafted the initial AFMP (2001 –2004) may have utilized a participatory approach to planning. For the succeeding AFMP (2005–2010), the DA used World Bank technical assistance from experts in the field, supported by a capability-building program for DA staff; whether the planning system 16The PMS-MED is due to conduct an initial review of the results indicators being monitored at the regional level beginning November 2022. 55 and the learnings were sustained and institutionalized remains to be seen, however, even though the AFMA has existed for more than twenty years. Development planning Lack of coordination contributes to poor planning , and poor planning practices compromise the attainment of goals. Planning at the department and agency level of government is generally guided by the PDP and consists of annual and medium-term plans and investment programs. Ideally, the planning exercise is participatory, where horizontal and vertical inputs from the organizational hierarchy are heard, processed, and consolidated in the plan. The DA’s case i s similar, with OPDS steering the process and the AFMP used as a guiding document. Inputs from the LGU level are incorporated through the RFUs, representing the DA at regional development councils chaired by a provincial governor and regional NEDA offices. The multiple plans from various exercises under the AFMA are potentially valuable inputs, but it is unclear who, how, and at what level in the DA hierarchy these plans are ever considered. The output from the whole planning exercise is a broad-based DA plan of action that provides the operations plan for different DA offices, split into operational strategies and detailed activities. Gaps in the DA planning process reveal the system’s inefficiency, contributing to inefficiency in budget allocations and overall low performance of the DA and the modernization and development program. The OPDS’ responsibility in the planning exercise ends with completing the broad -based DA action plan. Turning these action plans into operational strategies, activities, and delivery mechanisms resides with the pertinent office responsible for delivering results. The DA-PPD assumes responsibility for reviewing and consolidating the operational plans produced by the different offices. However, translating plans into budgetary items is a critical part of the process; linking the plan with the budget would ensure the careful planning of operational strategies, priorities, delivery mechanisms, and detailed activities to deliver expected results. The budget office on its own may not be able to determine such an important aspect of planning before making budget decisions. Closer collaboration between the two offices is essential. Results are the primary objective of planning . The plan defining the goals, objectives, strategies for achieving goals, the expected results, and the inputs that will help achieve goals is demonstrable in a log frame, a requirement under performance-based budgeting. Even though there have been several modifications, the results framework developed by the DA and anchored on the AFMA is insufficient. Output-outcome statements poorly describe expected results. Performance measures are few and lack clarity of targets. Coverage on bigger components of the AFMA is not measured for performance. The results framework serves as a basis for translating the operational strategies into budgetary statements and appropriations. Reviewing the results framework by DA is essential, especially at this stage in the transformation agenda. Both the framework and the budget must capture the details of the agenda. Yet the results-based management system (RBMS) is a complete cycle; the planning exercise is just the first step. The DA must be able to install the whole RBM framework in its management system, including the necessary changes needed to institutionalize it. The 1991 LGC allocates four code chapters for local fiscal administration. The code emphasizes principles of harmonization and alignment of local development plans with national development goals and objectives aimed at attaining results measured in terms of performance measures or physical targets. Investment programming can ensure alignment with national development plans. Active and value- adding participation of the national agencies in local investment programming is an output of the planning process. To be effective, national agency representatives, usually from DA regional offices, must articulate the DA priorities to support alignment and influence local investment prioritization. Participatory planning 56 in planning guidelines is encouraged but not mandatory for national government agencies in cognizance of local autonomy; LGUs can, however, undertake permissible initiatives under the LGC. Having prioritization criteria facilitates investment programming. Ideally, applying criteria provides a certain margin for adjusting, sequencing, and resequencing projects for budget allocation efficiency and better results. Most LGUs interviewed during the FGDs said they have developed prioritization criteria for planning and budgeting purposes. This report cannot challenge the criteria’s credibility, but expenditure allocation data at the sector level shows that agriculture ranks below the social and general services sectors. That indicates limited coordination and DA participation in the local planning process. This lack of participation contrasts with the health sector, where the Department of Health has institutionalized its participation in the planning exercise. NEDA and other oversight agencies have issued several guidelines and manuals that the LGUs may use as a reference for preparing their respective development plans . These are useful guides, but LGU staff are not bound to follow them and also use existing practices. In the AgPER World Bank FGDs, planning ranked among the top three areas where LGUs noted they require capacity building. While the FGD result may not represent LGUs’ capacity needs, this indicates the importance LGUs give to planning as an indispensable area for managing the development and the local economy. In summary, aligning local plans with national development goals should be embedded in the devolved services. The focus should be on aligning priorities at the local investment programming level, where DA participation and influence can be optimized. Accordingly, it would be helpful to craft a customized and continuing training program on the principles of strategic and effective planning and application that considers local demands that contribute to the community’s socio-economic development and national development goals and objectives. 57 It is not a simple task to balance devolution; international experiences are quite mixed on devolution’s contribution to economic growth and spending quality at subnational levels (Box 3.1). Box 3.1. Quality of Spending at the Subnational Level Decentralization in the developing world has increased, and implementation experience is diverse. Good governance has its inherent complexities, and aspects of decentralization are no exception. A World Bank Group evaluation (IEG 2008) spanning nearly 20 years of experience in 20 developing countries is dated yet still contains valid lessons. Readers of this AgPER are encouraged to consult this report as perhaps the best single source for further understanding the rich international experience in devolving governance. Of course, the wider pertinent literature is vast and has been subject to critical review (e.g., Dick-Sagoe 2020). Below are a few key lessons. Solutions must be tailored to country-specific contexts and driven by a commitment to reform at all levels of government. Even then, outcomes are sensitive to and positively associated with aspects such as subnational government capacity and political will.* ‘Quality’ is judged in many ways in devolved governance models, including economic efficiency, economies of scale, externalities, equity, access and accountability. Economic efficiency gains are often the main concerns in devolution initiatives, yet regional governments may not be capable of delivering public goods in an efficient and accountable manner. The quality of regional government is a better predictor of economic development than decentralization. Thus, decentralization reforms must consider the quality of the regional government to which they would devolve authority. Local funding difficulties have compromised the quality of local government services for agriculture. Issues include inadequate agricultural extension services due to the lack of support services, having many farmers, different priorities, a lack of appropriate training and support, and a lack of long-term strategy and vision. (contd.) 58 Economies of scale occur where the per-unit cost of producing a particular service falls or perhaps eventually rises, as the quantity of the service provided increases. In less developed countries, weak infrastructure may negate the advantages of economies of scale. Because there are challenges in meeting economies of scale in rural areas, implementing services that are best delivered at local levels requires careful analysis followed by appropriate legislation and capacity building. Externalities occur where the benefits or costs of a specific service in one local government jurisdiction spill over to residents of another jurisdiction. For example, a road in one municipality can benefit residents of neighboring municipalities who also use it. Sound economic analysis includes positive and negative externalities. Equity can refer to the ability to share costs and benefits of services fairly across LGU areas. One approach to this equity aspect is shifting the redistributive function to a higher level of government or for transfers to be allocated to LGUs based on need and fiscal capacity. Spending decisions are better aligned with local needs under democratic decentralization, and resources are reallocated in favor of the less advantaged. Higher levels of government have the capacity to provide oversight and ensure downward accountability. Capacity matters. Decentralization benefits seem weaker in more remote, isolated, and less literate localities. Such localities also tend to be more poorly served by mass media and are less likely to have adequate central oversight. Access and accountability are easier to achieve when LGUs are smaller and more fragmented. Smaller government units can provide citizens with greater access to local decisions because the ability of the public to monitor the behavior of decision makers falls as the size of the government increases. Trade-offs exist. In economic and fiscal terms, choosing an appropriate governance structure for LGUs depends on the weight given to different factors. Efficiency, access, and accountability point to smaller LGUs, while economies of scale, externalities, and equity suggest larger governments. There is no one-size-fits-all model, implying a need for careful analysis of the specific circumstances in which devolution is pursued. *See Philippines box IEG (2008, 22, Box 2.3) on assessing quality of spending at subnational levels. 59 Development budgeting The national budget is the financial translation of the GOP’s development goals and objectives. However, since the latter part of the 1990s, persistent fiscal constraints have characterized fiscal management, limiting the resources available for government spending. A dysfunctional PFM system harming timely and beneficial public service delivery worsens fiscal constraints. PFM processes are flawed, from planning to reporting, and spending cannot clearly link with performance. The PFM reforms introduced in early 2000 aimed to improve public expenditure management and strengthen budget transparency, integrity, and accountability. A group of RBMSs simultaneously launched to link expenditure with performance and delivery of tangible results. National agencies constructed logical result frameworks to establish the link between service delivery and measurable mandated agency targets and functions, including indicators to measure performance and achievement of tangible results. Twenty years hence, the reforms remain a work in progress as the agencies, including the DA, struggle to cope with the changing environment across sectors. Budget preparation is the most crucial part of budgeting, and linking the budget to a plan improves budget allocation efficiency. Budget preparation at the DA guides national fiscal policy, budgetary thrust, budget parameters, and procedural guidelines. Budget ceilings are apportioned and distributed by the DA-Central Budget Office to the various programs, projects, and services delivered by the different central and regional offices. A budget ceiling is a budgetary tool to keep expenditure programs within fiscal limits, while budget tiering aims to allocate overhead costs proportionately. Budget tiering allows priority programs and high-impact projects to get budgeted. The programmatic approach encourages agencies to review, classify and group homogeneous programs and projects into single programs and projects for cost efficiency, improved focus, and farmer benefits. The tools and approaches call for an in-office process of review, prioritization, consolidation, and horizontal and vertical vetting between various priorities at regional and central DA offices. However, there is a preponderance of multiple, non-term, homogeneous programs, such as commodity programs, and short-term, locally-funded mature projects. These increase overhead costs unnecessarily and lessen efficiency in allocating resources. The DA-Central Budget Office is the recipient of all budget outputs, but whether the tool-based mechanisms that vet these programs to ensure they meet the objectives of the budget ceiling and tiering is unknown. Annual national budget legislation authorizes spending within legal limits. The authorized appropriation is effective for spending within the year, though the DA can spend appropriations beyond the budget year or until fully spent because of the continuing appropriations provision of the AFMA. Continuing appropriations provide flexibility in scheduling and accelerating ongoing and new projects and recover unused appropriations from the past year, resulting in more accomplishments. However, records show that continuing appropriation is seldom fully used, low cash disbursement has become normal, and project delay characterizes the DA’s performance. Inefficiencies exist, as have already been pointed out in the planning and budget preparation systems or some other parts of the PFM system. The budget department shifted its system from an obligation to a cash budget in 2017 to harmonize the budget with the GOP’s fiscal and audit frameworks. The new system programs cash disbursements for current expenditures and prior years’ accounts based on g oods and services already delivered. It works especially for those engaged in multi-year and big-ticket infrastructure projects, with payments based on milestones and progress billings. The system tends to fast-track payments that enable the private sector 60 and contractors to recycle capital back to the system for new projects, thereby accelerating start-up and implementation. The system is a function of effective planning, budgeting, and procurement processes. While some agencies can cope with this system, some agencies suffer, including the DA. With most of its budget allocated for an in-kind subsidy, the DA’s programs and projects are procurement heavy, requiring early scheduling before the start of the planting and harvesting season. The efficiency of the procurement bidding process depends on the procurement plan’s credibility, which the DA submits as a supporting document for its budget proposal. The plan is the product of a procurement planning exercise. This long process involves writing accurate product specifications; estimating quantities based on demand from the field, the number of farmer recipients, and vetting against inventory; estimating costs based on price canvassing, availability of suppliers and goods, and scheduling or procuring in time for the season. Assembling such information requires skills and expertise. The DA complies with the procurement plan requirement of the budget, but the actual use of the plan depends upon its accuracy and reliability. The central office holds bids for procu rements above ₱ 50 million, while the regional offices handle procurement below the threshold. There are frequent delays in procurement, and deliveries do not reach farmers in time for the season. Problems may arise, including claims that goods and services did not match farmers’ needs, that defective goods were received, and that some registered farmers received goods while some did not. Though reported, confirmed by audit findings, and discussed with DA management, these problems persist. The pertinent provisions of the LGC (Chap.3, Title V) guide local government budgeting. The form and content of the local budget, the review and approval structure, the legislative authorization, budget policies, and principles are all patterned after the National Budgeting Framework. The local chief executive submits the budget to the local council, which then enacts the annual local budget appropriations by issuing the appropriation ordinance. Per the LGC provision on inter-local government relations, the provincial council has the authority to review budget ordinances of component cities and municipalities. Component cities and municipalities review barangay 17 appropriation ordinances under their respective jurisdictions. The DBM reviews appropriation ordinances of the LGUs within the Metro Manila Area (LGC, Sec 326) per Sec 325(h) of the same code. LGUs generally follow budgeting policies and principles, but many, especially lower-income LGUs, suffer such a lack of staffing and funding that following budgetary rules and procedures are highly challenging. Many LGUs that have used and conducted self-assessment for PFM claim to need further capacity building and that the budget briefings and training conducted by DBM regional offices are inadequate. The DILG, NEDA, DBM, and DOF-BLGF jointly supported the LGUs by crafting capability programs designed to capacitate the LGUs in improving service delivery, fiscal administration, and PFM systems by issuing policies and procedural guidelines. These bodies also supported introducing operating manuals, tools for self-assessment, and incentive programs. Budget monitoring, evaluation, and reporting Input-based budgeting characterized the Philippine budget system from the late 1900s until the early 2000s. From 2000 onwards, the system adopted an output-outcome-based budget method following a series of budget reforms, transitioning it into a results-based management system to achieve national development goals. 17 Barangay is the term for a village, district, or ward in the Philippines. 61 The DA was one of the earliest departments to establish a results-based framework. The framework is AFMA-based but lacks a coherent link between and among the policies, strategies, and inputs that would enable the DA to meet the modernization objectives. The performance targets and indicators cover selected interventions that do not fully measure relevant AFMA outputs and outcomes. There is no dedicated monitoring system to track progress or generate data. Each banner program monitors its own work and generates its databases independent from one another, resulting in a disintegrated monitoring system unable to produce reliable and timely information for management and budget decisions. Financial information and physical accomplishments are monitored separately by the budget office for compliance purposes, with oversight agencies’ reporting requirements to DA management. An effective and efficient M&E system should help shape policies and support well-informed management decisions and is a function of efficient planning and budgeting processes . These are based on results from defined goals, performance targets, and measurements, and the data needed for evaluation, reporting, and decision-making in the PFM system loop. The DA must develop an integrated system to link planning and budget outputs. RBMSs have been introduced to the LGUs through national planning, budgeting, and monitoring guidelines but are not yet functioning at the LGU level. Though basic information is made available to them, LGUs have yet to fully absorb and adopt RBM in their respective planning, budgeting, and monitoring systems. The LGUs interviewed in the AgPER FGDs have acknowledged the advantages and importance of RBM but admitted they lack knowledge and expertise. The LGUs agreed that the capacity program for LGUs should include full training on RBM. 62 4 Distributional Impact 4. Distributional Impact Key messages The DA’s top-down, commodity-based expenditure programming prioritizes rice, fisheries, high-value crops, corn, and livestock. Such ranking leads to several strange results that imply an inability to address important criteria for public spending, namely congruence to the size of the sector being supported, and addressing poverty alleviation and social equity. The DA’s spending priorities by commodity are misaligned with the size of economic activity: o Ranking by value of output prioritizes high-value crops, and then rice, livestock, fisheries, corn, coconut, and sugarcane. o For most regions, the DA allocation is disproportionate to the size of the regional agricultural economy. The DA’s spending priorities by commodity are misaligned with the magnitud e and incidence of poverty among agricultural producers and workers. The main sources of livelihood for poor agricultural households are, from highest to lowest, agricultural labor, corn, rice, coconut, other crops, and livestock. Meanwhile, based on poverty incidence, the ranking is corn, followed by agricultural labor, other crops, fisheries, chicken, and rice. The DA allocation seems to be based on the number of farmers planting the priority crops, especially rice and corn, rather than adjusting to the magnitude of agricultural activity or the number of poor agricultural laborers. Distribution as a Criterion for Evaluating Agricultural Public Expenditure There is a strong basis for using distributional equity in assessing agricultural expenditure programs of the government across space, i.e., regional distribution, or across subsectors, i.e., commodity distribution. Previous assessments of DA expenditure after the World Bank (2007), such as David et al. (2012), OECD (2017), and Briones (2022b), focus on the effectiveness and efficiency of public expenditure but not distribution. The Constitution (Article XII, Section 3) identifies a goal of the national economy as a “more equitable distribution of opportunities, income, wealth.” This Constitutional goal reflects the Magna Carta of Small Farmers of 1992 (RA 7607), which asserts in Chapter 1, Section 2 that the “declared policy of the State to give the highest priority to the development of agriculture such that equitable distribution of benefits and opportunities is realized through empowerment of small farmers.” Another law recognizing the distributional criterion is the AFMA of 1997 (RA 8435). In its Declaration of Policy (Section 2), the Act states five principles: poverty and social equity, food security, the rational use of resources, global competitiveness, and sustainable development. Hence, assessing agricultural expenditure programs should incorporate poverty and social equity impact. We find a precedent for this in the PRDP, where the following criteria can identify commodity priorities in each province: agronomic suitability, market potential, impact on the poor, number of growers and producers, and overall 63 suitability. Similarly, in RA 8435, the Basic Needs Program was described as a community-based program under the SAFDZ approach. Selecting communities includes areas identified as priority communities under the Social Reform Agenda. Below we provide a regional analysis using poverty estimates for agricultural households obtained from the Family Income and Expenditure Survey (FIES). Regional estimates are based directly on PSA official data on the poverty of basic sectors, namely, farmers and fisherfolk. The data set obtained by merging the Labor Force Survey and the FIES Estimates is used to create estimates by commodity. The association of households by agricultural commodity is based on the primary occupation of the household head, for those household heads whose primary occupation is in agriculture. Regional Allocation Assessment based on output The DA allocation is disproportionate to the size of the regional agricultural economy in most regions. The regional allocation of the DA budget seemingly favors Luzon regions, but this seems somewhat justified looking at regional allocations as a ratio to agricultural GVA (Table 4.1). Allocations for Regions III and IVA are less than the ratio of total regional allocation to total agricultural GVA of the regions where a breakdown is available. This implies that, relative to regional agricultural output, Regions III and IVA are receiving smaller allocations than the average region. However, the most lopsided allocations are for CAR and Caraga. Out of 15 regions, ten have a ratio above the ratio for total allocation, which is 2.0. Table 4.1 Regional DA Expenditure as a Proportion of Agricultural GVA, in Current Prices (%) 2015 2016 2017 2018 2019 2020 2021 CAR 5.2 9.9 11.4 6.0 7.1 5.1 5.2 Region I 2.1 1.2 1.4 2.2 2.0 1.7 2.1 Region II 2.2 3.2 3.3 3.0 2.2 2.0 2.2 Region III 1.3 0.4 0.7 1.6 1.5 1.4 1.3 Region IVA 1.3 0.5 1.1 1.1 1.3 1.4 1.3 Region IVB 2.7 3.0 3.3 2.5 2.4 2.7 2.7 Region V 2.3 2.2 1.9 2.9 2.7 2.6 2.3 Region VI 1.4 1.2 1.1 1.2 1.3 1.2 1.4 Region VII 2.4 2.5 2.2 2.0 1.9 2.0 2.4 Region VIII 3.3 2.3 2.3 2.7 2.7 2.3 3.3 Region IX 2.3 2.8 2.7 2.2 2.1 2.0 2.3 Region X 1.3 1.1 1.0 0.9 0.9 0.8 1.3 64 2015 2016 2017 2018 2019 2020 2021 Region XI 1.3 1.9 1.4 1.3 1.5 0.7 1.3 Region XII 2.6 1.2 0.9 1.7 1.5 1.3 2.6 Caraga 5.0 3.6 2.7 3.1 3.2 2.9 5.0 Total 2.0 1.7 1.7 1.9 1.8 1.6 2.0 Sources: PSA (2022), DBM (2022). Note: GVA = Gross value added. Allocation by island group is configured around the number of crop farmers . The FFRS last collected data by enrollment of farmers and fisherfolk in 2020, yet this information is still being coded. Figure 4.1 summarizes the latest figures in terms of crop farmers, i.e., any single crop planted by a farmer counts as one observation. Though incomplete, it is a good indicator of the geographic distribution of crop farmers. Luzon has the most rice and corn crop farmers by far. Visayas accounts for most sugarcane farmers, while coconut and banana crop farmers mostly reside in Visayas and Mindanao. Figure 4.1 Distribution of Crop Farmers by Island Group (%) Source: DA. The DA spending priorities by commodity misalign with the size of economic activity. Based on the banner commodity programs, the funding priorities are rice, fisheries, high-value crops, corn, and livestock, based on five-year allocations for 2017–21. In contrast, the ranking by output value places high-value crops first, followed by rice, livestock, fisheries, corn, coconut, and sugarcane; here, the term high-value crops include all crops aside from rice, corn, coconut, and sugarcane (RA 7900). The misallocation is even sharper when considering all other funding for rice, namely the funding for NIA, the NFA, and the dedicated ₱ 10 billion for the Rice Competitiveness Enhancement Fund, which is separate from the NRP. After rice, the other banner commodity programs place less priority than warranted for livestock; the 2022 allocation seems to rectify this, although it may simply be a one-off funding surge to rebuild hog inventories. Coconut and sugarcane growing is underfunded; the Coconut Farmers Industry 65 Trust Fund (RA 11524) may redress this in part but risks going the way of the Sugar Industry Development Act (RA 10659). The DA budget priorities better align with food security, especially towards self-sufficiency in rice, corn, and fisheries. Assessment based on poverty The DA spending priorities by commodity poorly align with the magnitude of poverty among agricultural producers and workers. Based on population count, the main sources of livelihood of poor agricultural households are, in order: agricultural workers, corn, rice, coconut, other crops, and livestock. Based on poverty incidence, the ranking changes to coconut in first position, followed by corn, agricultural workers, other crops, fisheries, chicken, and rice. This ranking misaligns with the commodity priorities of the DA, which hardly recognizes agricultural workers and prioritizes rice, followed by fisheries, high-value crops, corn, and livestock. The DA allocation is disproportionate to the magnitude of poor farmers and fisherfolk, with Visayas and Mindanao regions at a relative disadvantage . Figure 4.2 presents the ratio of share in total regional allocation to share in total poor farmers and fisherfolk. The Luzon regions all have ratios above unity; the biggest ratio is for Central Luzon, i.e., its expenditure share is four times larger than what it should be if the number of poor farmers and fisherfolk determined regional allocation. Figure 4.2 The Ratio of DA Regional Allocation Shares to Poverty Shares, 2018 Source: DBM (2022). Assessment based on rankings Comparing regional rankings, the DA allocations for Visayas and Mindanao underprioritize regions with higher poverty and agricultural GVA. The comparisons above contrast the size of regional budgets with the size of other indicators such as agricultural GVA or the number of poor persons. Alternatively, we can simply base comparisons on the ranking of spending priorities vs. ranking based on output and poverty indicators. Table 4.2 displays the regions sorted in ascending order of expenditure allocation; also shown are rankings of each region based on the size of agricultural GVA and poor agricultural population, both in descending order. For instance, the first-ranked region by expenditure is Region III, which is also the first-ranked region by GVA, with a deviation of zero. However, the first-ranked region by expenditure is only ranked eleventh by poverty, with a deviation of 10. 66 Table 4.2 Comparison of Regional Ranking Based on Different Agricultural Indicators, 2018 Relative to expenditure rank Relative to poverty rank Region GVA rank Poverty rank GVA rank Region III 0 10 1 Region II 6 7 8 Region I 4 12 7 Region V 9 8 9 Region IVB 4 1 13 Region VI 1 1 5 Region IVA 3 6 4 Region XII 7 6 6 Region VIII 3 8 12 Region VII 8 4 10 Region X 1 8 2 CAR 2 7 15 Region IX 10 5 11 Region XI 3 12 3 Caraga 1 5 14 Mean absolute deviation 4.1 6.7 3.9 Source: Author’s calculation. Note: Poverty denotes the population count of poor agricultural households. The spending priority for a region is, on average, about four places different from the ranking of that region in terms of GVA and about six places higher or lower based on its ranking by the number of agricultural poor. Therefore, the mean absolute deviation is smaller for the GVA ranking than for the poverty ranking. Although an expenditure allocation need not exactly align the rankings based on one indicator, doing so will inevitably entail misalignment with other indicators. Table 4.2, the third column presents the GVA ranking relative to the poverty ranking. The mean absolute deviation is 3.9; aligning expenditure priorities to rank regions consistently with agricultural poverty will deviate from GVA ranking by an average of about four places. The reality of trade-offs across various indicators should be 67 recognized. The preceding comparisons seek to unearth the size and patterns in the misalignment and ways forward for DA expenditure allocation. 68 5 Conclusions and Recommendations 5. Conclusions and Recommendations Key messages Improving the quality and effectiveness of agricultural public expenditure strengthens the argument for enhancing the share of the overall budget allocated to agriculture. Past agricultural development strategies have been overly focused on raising self-sufficiency in a few products, especially rice. This focus has detracted from other goals that would have led to higher growth, enhanced competitiveness, poverty reduction, and sustainability. Traditional strategies have relied heavily on support mechanisms, especially input subsidies, price supports, and trade protection. These are poor instruments for achieving these goals, and they have many negative effects, including crowding out private investment, discouraging farmers from optimizing their farm management skills, and reducing resilience. While the ideas within the New Thinking support a reorientation of traditional policy directions, the budget allocations do not yet reflect this change in direction. The review recommends several strategic and programmatic reforms over various time scales: • In the short run, reform input subsidies should either be eliminated in one step or in phases, using a voucher system initially • In the medium to longer term, there should be a transition to a system of decoupled payments for direct support to farmers instead of input- and output-based support • In general, shifts are needed from expenditures for ‘private goods’ (various subsidies) to currently under-funded public goods, such as research, extension, and farm roads • Address localized market failures with financial support that improves value chain coordination and integration in line with the F2C2 approach using tools such as productive alliance programs The review recommends several institutional and process-related issues actions with the following objectives: • Improving the low disbursement rate of the DA budget • Enhancing evidence-based decision-making in program design and budgeting by building better systems to monitor and evaluate programs and projects The recent positive policy directions embodied in the New Thinking and One DA agenda have not yet led to a shift in public expenditure patterns in the Philippine agriculture sector. One result is that agricultural growth remains low, and poverty in rural areas where farming remains the main source of income has stayed high. Underinvestment in public agricultural goods, vital for inclusive growth, also drives the lack of 69 growth. The continued bias supporting rice production has come at the expense of other agricultural products. The situation could worsen with the ongoing devolution resulting from the Mandanas Ruling of the Supreme Court, unless the shift in the agriculture budget from central government to local government units (LGUs) accompanies clear changes in expenditure policies. To take full advantage of the opportunities arising from the new strategic directions and to devolve more responsibilities to LGUs, agricultural public expenditure policies must deal with challenges in three dimensions. First is the challenge of aligning expenditures with the ambition of the New Thinking. There is a need to transition away from previous and current spending patterns focused on increasing self-sufficiency through commodity-based banner programs, especially rice, towards investments in improving the overall resilience, competitiveness, inclusiveness, and sustainability of the agriculture sector. There are three ways to achieve such improvements by (a) shifting from a single-commodity and production-based approach to a more holistic and area-based planning approach; (b) focusing more on programs that fund public goods that are currently under-funded, such as research, agriculture extension and innovation systems, market information systems, infrastructure, biosecurity systems and programs supporting CSA; (c) providing more emphasis to programs intended to overcome barriers to collective action and economies of scale. The second challenge is improving the currently low effectiveness of public spending, which is one factor behind the relatively low agricultural share in the government’s overall bu dget. Improving effectiveness will require correcting the problems that lead to low budget disbursement rates and the institutional and procedural shortcomings that impede the government’s ability to monitor and evaluate outcomes and make evidence-based decisions. It will also require important changes in how the government supports farmers. The reliance on support instruments that are inefficient tools for improving farmers’ competitiveness and productivity needs to change, particularly government provisio n of subsidized fertilizer, machinery, and other inputs. During the transition period of the rice liberalization, when support to affected rice farmers is needed, the government could implement a short-term e- vouchers system. Such a system would grow the private sector in input markets and give farmers more flexibility in managing their production decisions compared to the current subsidies. In the medium to long term, the government could consider an even more efficient mechanism and decouple support payments, which do not depend on the types of commodities or inputs. The third challenge is successfully implementing the financial and functional devolution resulting from the Mandanas Ruling. In the 1990s, the effort to devolve agricultural services did not go smoothly and was largely reversed. To avoid a similar fate with the current effort and fully realize this transfer’s potential benefits, the government must carefully consider which functions to transfer and what capacity building will be necessary for LGUs to carry out newly transferred responsibilities successfully. There will also need to be some mechanism in place to ensure that spending decisions at the local level align with the national interest and strategies. Challenge 1: Changing the Strategic Focus to Better Align Expenditures with the New Thinking One key finding of this report is that public agricultural expenditures should align better with the ambition of the New Thinking. 70 First, the strategic focus on increasing self-sufficiency is outdated, incompatible with the New Thinking, and needs to change. An important objective underpinning past agricultural spending policy was a desire to achieve high levels of self-sufficiency in food products, especially rice. This strategic objective has driven spending decisions, and its impacts reverberate throughout the agricultural economy due to the magnitude of money spent and the inefficiencies generated by spending programs. Self-sufficiency in a few staple food products, mostly grains, was closely linked to food security in the past but domestically producing food is no longer seen as either a necessary or sufficient determinant of food security. Global trade in agricultural products has greatly expanded and become less subject to disruptions. Incomes have risen, and tastes have changed, meaning rice is a much smaller component of diets than it used to be, both nutritionally and economically. More generally, these staples no longer dominate dietary patterns. This pattern typically emerges as countries reach higher income levels. Consequently, food security is more a matter of household-level financial purchasing power, nutritional status, and resilience to shocks rather than national production and self-sufficiency of low-value staple products. A recent report on global food security ranks Singapore, which has virtually no production, as the most food-secure country in Asia outside of Japan (Economist Impact 2021). Reorienting policy towards the New Thinking objectives will likely enhance the quality of public expenditure, boost agricultural sector growth, and raise the incomes of farmers and fisherfolk. Such an explicit reorientation has been successful in other countries, such as Chile and New Zealand, where a vibrant, dynamic system has replaced stagnant agricultural growth (World Bank 2021). This strategic reorientation will lead to a more holistic approach to spending rather than a heavy focus on commodity- specific programs. The New Thinking strategy and updating the NAFMIP 2021 –2030 reflects this needed policy reorientation. These show that the DA intends to shift from a single-commodity approach to a transformative commodity-systems-based approach. The DA aims for this approach to operationalize the diversification strategy of the Department and intends to replace the single-commodity and production- centric programming and project planning, budgeting, and implementation. Results will depend on how well this reorientation is operationalized in policy and spending decisions, which have not yet changed. Recent budgets, including the 2022 DA budget, do not reflect this new strategy. For the banner programs overall, the budget allocations for 2021 and 2022 were more than 50 percent higher than for 2019 and 2020 (Table 5.1). In the 2022 budget, the banner programs accounted for about 38 percent of the DA’s budget, compared to 27 percent in 2020. Most of this was due to the huge increase in the budget for rice. However, even after subtracting out the rice allocation, the banner programs’ budget increased by 23 percent from ₱ 8.7 billion to 10.7 billion from 2020 to 2022, indicating that a reorientation of spending priorities has not yet begun. There is much support for palay production outside the DA budget, especially through the National Irrigation Agency, which is largely devoted to irrigated rice production. The strategic emphasis on self-sufficiency as an objective is evident in using the self-sufficiency index as an important sectoral performance indicator in products other than rice. Despite the intentions, there have been no changes in spending decisions, signaling that the reorientation away from commodity-based programs—especially rice and other single commodity programs—has not yet begun. 71 Table 5.1 DA Allocation for the Banner Commodity Programs 2017 2018 2019 2020 2021 2022 Share in DA appropriation (%) 50.5 43.9 31.4 27.4 36.1 38.2 Total allocation (₱ billion) 22.9 23.8 15.6 15.6 23.9 27.5 ● Rice 9.7 11.8 7.4 6.9 15.5 15.8 ● Livestock 1.5 1.6 1.2 1.1 1.2 5.2 ● Corn 2.8 3.0 1.6 1.5 1.5 1.5 ● High-value crops 4.0 3.1 1.5 1.4 1.8 1.5 ● Organic agriculture 0.8 0.8 0.5 0.5 0.8 0.5 ● Fisheries 4.0 3.5 3.4 4.1 3.1 3.0 Shares in total allocation (%) ● Rice 42.6 49.6 47.6 44.6 64.8 57.4 ● Livestock 6.7 6.7 7.5 7.1 4.9 18.7 ● Corn 12.4 12.6 10.0 9.4 6.3 5.4 ● High-value crops 17.3 12.9 9.9 9.3 7.5 5.5 ● Organic agriculture 3.6 3.4 3.5 3.5 3.3 1.9 ● Fisheries 17.5 14.9 21.5 26.2 13.2 11.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: DA. This review first recommends a transition in budgeting from a commodity-based planning mechanism to one more area-based, focusing on more holistic objectives rather than production targets. This correction would involve adopting bottom-up, area-based planning based on strategic agricultural zones focused on maximizing farm incomes for all producers, reducing poverty, and focusing on sustainability rather than maximizing production. Reorientating spending away from the single commodity approach and enhancing the cost- effectiveness of spending would also help reduce some of the inequity in current allocation patterns, which misalign with the magnitude of poverty among agricultural producers and workers. Based on population count, the main sources of livelihood of poor agricultural households are, in order: agricultural workers, corn, rice, coconut, other crops, and livestock. There is some reranking based on poverty, with coconut placed first, followed by corn, agricultural workers, other crops, fisheries, chicken, and rice. As documented in this review, this is misaligned with the commodity priorities of DA as reflected in the budget, which hardly recognizes agricultural workers and places paramount importance on rice, followed by fisheries, high-value crops, corn, and livestock. As a result, budget allocations among regions are consistent with priorities based first on the size of constituencies—that is, numbers of farmers and fisherfolk—rather than the level of poverty, economic activity, or potential. The spread of allocations is 72 an inevitable, albeit unintentional, result of the heavy support of rice farmers —who are not the poorest on average—and subsidy use, which disproportionately favor larger farmers. As such, regions with large numbers of rice farmers and larger farms capture most of the support. The DA is laying the foundation for this shift to a more area-based approach through its use of spatially based planning tools. Some tools are already developed, including the Expanded Vulnerability and Suitability Analysis (eVSA) in use by the PRDP, Climate Resiliency and Vulnerability Assessment (CRVA), and Sustainable Land Management (SLM) tools. Spatial planning will focus on developing Agriculture and Fisheries Industrial Business Corridors (AFIBCs) 18, Fisheries Management Areas (FMAs), Indigenous People areas, and SAFDZs aligned with NAFMIP’s spatial framework. In updating the NAFMIP 2021–2030, spatial- based planning was incorporated through its Integrated Spatial Planning Framework (ISPF), which aims to map out and plan agricultural activities while considering the social, economic, and environmental changes that would bring about such activities. The ISPF of NAFMIP is mainly premised on an integrated land-use planning approach that also incorporates and utilizes the developed tools for suitability, i.e., eVSA, climate change vulnerability, i.e., CRVA, and sustainable land management, i.e., SLM tools. The ISPF will address the country’s growing demand for food and agricultural products driven by rapid population growth and competing use of resources. Continuing to rely on inefficient support mechanisms and focusing on single commodity programs will undercut the effectiveness of these valuable tools. A second element to meet this challenge of better alignment is to focus more on programs that fund public goods that are currently under-funded. Many important public expenditures benefit the agricultural sector as a whole or large groups of farmers instead of only the individuals receiving the subsidies without displacing commercial channels of goods and service provision. In contrast to subsidies, which pay for private goods that individual farmers could purchase more efficiently, spending in these areas provides true public goods. Increased public spending and spending less on private goods have successfully increased the quality and impact of agricultural expenditure worldwide. Reducing subsidies would create budget space to ramp up spending on public goods like research and extension, market information systems, and infrastructure, including the maintenance of FMRs, a problem identified in a recent review. Public spending could also increase on biosecurity systems and programs supporting CSA. Evidence from international studies documents the cost-effectiveness of focusing public spending on public goods (Lopez and Gallinato 2007; Goyal and Nash 2013). Agricultural research is a classic public good, which yields high benefits by increasing productivity and raising incomes at very modest costs. Spending on research in the Philippines is very low—about ₱ 1,213 million in 2019, relative to an agricultural GDP of about ₱ 1,722 billion that year —and needs to be significantly enhanced in quantity and quality. Note that this figure does not include research spending falling outside the banner programs, data on which was unavailable to the mission. Developed countries with strong agricultural sectors, such as Australia, New Zealand, France, and the Netherlands, report investments in public agricultural R&D of 3–4 percent of AgGDP, often supplemented by strong private agricultural R&D investment. In a survey of research programs in Southeast Asia, a recent study by the Agricultural Science and Technology Institute concluded that the Philippines had a research intensity of 0.41 percent as of 2017 (Figure 5.1). This figure placed the country in the middle among the Southeast Asian countries but far below best practice examples globally. The country had the greatest gap between 18 The Program aims to develop strategic areas to become agriculture complexes catering to different value chain stages. When prioritized, ABCs can be a great avenue to attract private investments. 73 actual and attainable investment in agricultural research among all these countries (ACIAR, IFPRI, and ASTI 2021).19 The government should improve agricultural research priority setting and allocate its research resources in a more targeted manner in close consultation with the technology users. This consultation should be a key objective of the devolution process, which should improve mechanisms for collecting feedback from beneficiaries of the research efforts. Research priorities should recognize that publicly funded research should not focus on technologies that can be readily commercialized to leave space for the private sector to develop them. Finally, the regulatory and trade regime should leave space for private sector development in importing new varieties of seeds, other inputs, and technologies from abroad. Figure 5.1 Actual Intensity Ratios and Attainable Investment Targets Investments in improving extension services also offer big rewards, particularly those with strong public goods characteristics such as disease prevention and control, climate adaptation, or those with significant demonstration effects beyond the immediate beneficiaries . There have been major developments in digital agriculture and new information and communication technologies and tools. Such developments have led to major agricultural extension and advisory service delivery improvements. New modes of communication between agents and farmers allow more efficient dissemination of information than the old face-to-face contact model. As extension services are increasingly decentralized, investments in technologies that help local extension staff reach a larger number of farmers should have high payoffs. One class of public goods that will require increased attention and budget is policies and programs to increase CSA through increasing the resilience of the agri-food system to weather shocks and reducing GHG emissions from the sector. Climate-related disasters are a significant threat to Philippine agriculture, and this threat is likely to be magnified over time by global warming related to GHG emissions. Philippine 19As measured by the difference between actual research intensity (Public research expenditure/AgGDP) and potential attainable research intensity, as estimated by the ASTI. 74 agriculture, particularly in the rice sector, contributes significant emissions, and the sector can do much more to increase its resilience to weather shocks. The following are some key CSA recommendations: h) Reform agricultural support policies to encourage more diversified production systems, which tend to be more resilient to climate shocks, while reducing support for rice, one of the biggest producers of GHGs. i) Improve water management and pricing policies to increase incentives for efficient use. This means curtailing both the provision of free irrigation and the use of non-volumetric water charges based on the area of land irrigated rather than water volume. j) Phase-out fertilizer subsidies20 as these encourage the over-use of nitrogen fertilizers, which produce nitrous oxide, a highly potent GHG with 265 times more global warming potential by volume than carbon dioxide. k) Use legal and regulatory reform to provide greater tenure security for farmers to encourage investments in more resilient, integrated, and diversified agriculture systems. l) Support information generation and dissemination to promote CSA technology adoption. Many innovative and longstanding production technologies are available, including a number for rice, such as alternate wet-dry production. Measures to promote the adoption of appropriate CSA techniques include increased investments in research on climate impacts and technologies for both adaptation and emission reductions. Measures also include enhancing systems to disseminate this information, for example, by strengthening linkages between PAGASA, the national weather service, and extension systems. m) Take advantage of the Mandanas process to build local capacity for mainstreaming CSA into policies and planning. This process should ensure inclusion in community planning since CSA solutions are only sustainable if there is strong community ownership (World Bank and BioCarbon Fund 2021). n) Subsidize adopting CSA production technologies where appropriate and use social safety nets for disaster relief where feasible, rather than setting up special programs. Decoupled direct payments are well suited to promoting climate-smart technology adoption and are designed for this in other countries. Programs involving direct payments to farmers are generally more appropriate to subsidize farmers’ investments to reduce emissions, a global public good, than to help farmers adapt to climate change when benefits individual farmers most. Exceptions to this may be needed based on equity objectives in the case of poor, resource-constrained farmers who would not be able to finance adaptation without government assistance. Beyond humanitarian considerations, it may be more cost-effective to finance ex- ante preventative actions than ex-post disaster relief. In any case, a comprehensive CSA strategy should include measures to include farmers in any disaster relief program, with payments delivered in a timely way to assist in recovery and replanting in the earliest possible season. Several instruments are being used around the world to encourage climate-smart actions. One general approach is payments for environmental services (PES), in which producers are paid directly—either by 20Due to the current geopolitical scenario on account of the Russia-Ukraine war, fertilizer prices have skyrocketed. This has led the DA to provide a temporary cushion to counter rising fertilizer prices through additional subsidies. 75 the government or private parties—for taking actions that enhance the benefits provided by natural resources through better management or avoid environmental damage. An alternative approach in some countries that provide direct support payments to farmers is to make these payments contingent upon farmers’ actions that preserve the environment. The US, EU, Vietnam, China, and other countries use some variants. This kind of conditional climate-smart payment can make agricultural support or subsidy reform programs more politically palatable; they allow farmers to maintain their incomes while incentivizing them to adopt climate-smart practices. These programs have been described by the World Bank (2020) and more in depth by Cassou (2018). A good resource to explore implementing CSA approaches using integrated land use programs is at www.biocarbonfund-isfl.org/knowledge-center. This website also includes resources to explore various international programs that help finance climate-smart payments in individual countries. The third measure needed to improve budget alignment with the New Thinking objectives is to provide more funding to programs to overcome barriers to collective action and economies of scale. Funding would also include an increased focus on improving value chain coordination and integration under the F2C2 initiative, with government support for efforts to overcome market failure by supporting buyers and producer organizations in preparing and implementing profitable business plans. This response can include investments and technical assistance to strengthen the organizational and entrepreneurial capacity of producer organizations, their market-led production, access to input and output markets, and technical, social, and financial services. Matching grants to help bring together producers and agribusiness can also be useful. These are the arrangements used by programs that have successfully implemented the productive alliance model in Bolivia, Brazil, Colombia, and Vietnam. Measures to support collective action will also promote CSA investment options with high investment costs, e.g., solar-powered pumps, biodigesters, and small farm reservoirs, and therefore require joint action by groups of farmers. The PRDP has already successfully implemented such a model through its Enterprise Development Component. Challenge 2: Improving the Low Effectiveness of Current Spending and Providing the Basis for a Higher Budget Allocation for Agriculture This review found that the share of the overall budget devoted to agriculture has been fairly low in recent years relative to the sector’s size and has been declining over time. No magic number indicates a 'correct’ allocation of the national budget for the agricultural sector, yet principles and metrics can inform this decision. It is useful to look at comparative countries and trends over time. Other public expenditure reviews have used the Agricultural Orientation Index (AOI) metric, which measures agriculture’s share of the total budget relative to the sector’s share of national GDP.21 The FAO results shown in Figure 5.2 for AOI from 2001–2020 shows all countries analyzed ('World’), for Asian countries as a group, Southeast Asian countries as a group, several individual Southeast Asian countries, including the Philippines, as well as two agricultural powerhouses, Australia and Brazil. The overall budget share allocated to agriculture began a steady decline in 2016. By 2020, it was lower than most comparator countries relative to the size of agriculture in the economy. While there are many reasons for this trend, this review concludes that agriculture has not fared well in the political melee of budget allocation partly because of the perception that the spending of funds allocated to the sector was 21 AOI = (Ag budget/Total budget)/(AgGDP/National GDP) 76 ineffective. We examine below some factors that have contributed to this outcome and suggest how it could be improved. Specific policy instruments employed and procedural issues in the budget process have reduced the effectiveness of agricultural public expenditure in achieving its objectives. Improvements in both dimensions would make a stronger case that funding for agriculture is money well spent and bolster the case for increasing agriculture’s share in the political melee of the allocation process. Demonstrating that the budget devoted to agriculture delivers more value per dollar could help agriculture receive a higher allocation in future budgets. 0.90 0.68 0.45 0.23 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 World All Asia South-eastern Asia (MDG=M49) Vietnam Figure 5.2 Agriculture Orientation Index (AOI) for Government Expenditures Source: FAO (2022). Changing instruments used to support farmers would enhance the effectiveness of spending This review finds that current expenditure patterns provide very significant input subsidies as a major instrument of support for the rice sector and other specific commodities. Yet these subsidies have been unsuccessful in improving the productivity and competitiveness of Philippine producers. Such subsidies represent a large public expenditure with a small impact for three reasons. First, as experience throughout the world demonstrates that input subsidies are an inefficient way to raise productivity. Subsidies can increase production, but the true value to the economy of the inputs used for the production is greater than the product’s real value. Second, the uniform, one-size-fits-all administration of subsidies makes it difficult for farmers to use their knowledge and adjust input use or land management practices to meet 77 the requirements of their own land parcels. Third, farmers gain little incentive to improve their own management skills. Fertilizer distribution procedures also interact with the budgeting system in problematic ways. Budgets can suffer from delays, while in-kind distribution means the government must be involved in complicated bidding procedures with opportunities for slippage or mistakes at several steps. Audits indicate that (a) some farmers do not receive the fertilizers they are registered to get, (b) delivery is too late, thereby hindering farmers’ ability to follow good management practices in fertilizer application, and (c) the products delivered do not meet farmers’ needs and are sometimes defective. The way subsidies are distributed also limits private sector investment in upstream activities. For example, free fertilizer and subsidized inputs are distributed directly to farmers. Subsidies raise the incomes of beneficiaries, but they do so regressively . Subsidies are regressive since larger farmers who use more inputs receive more money from subsidies than smaller counterparts. While household surveys cannot quantify benefits for different groups, poor smaller farmers inevitably benefit least from the system as they receive fewer input subsidies. Similarly, they consume much or all of their products, so they benefit little from output price subsidies, if at all. Yet larger, richer farmers also benefit because they produce more outputs that they can sell. Moving away from subsidies as major policy instruments could greatly enhance public expenditure effectiveness. During the transition period of the rice liberalization, when support to affected rice farmers is needed, this review recommends options over various time scales to achieve greater efficiencies in spending on direct support to farmers. ● In the short term, moving to an e-voucher system for input subsidies would give farmers more choices and incentives to develop better farm management skills and encourage private sector development in input supply. Farmers should be able to use vouchers for a wide menu of options, including any inputs or farm services, encouraging them to develop better farm management skills. Digital technologies are now substituting paper vouchers in other countries and provide several advantages, so the Philippines should aim to use these wherever feasible. A voucher system would also help resolve the problems of delayed distribution noted above. ● In the medium to longer-term, input- and output-based support, including protection through high tariffs, could be replaced with a decoupled cash payment. Such a cash payment system would not depend on current input use, product choice, or production quantity. This mechanism can support farmers’ incomes without creating production biases favoring any specific crop or favoring the negative effects of input subsidies. Decoupled payment schemes have supported reform in the EU, USA, Turkey, Mexico, and other countries, where the form of payment has been per hectare. Box 5.1 describes the numerous advantages of a decoupled payment system. 78 Box 5.1. Smarter Support to Agriculture: Decoupled Direct Payments In the 1980s, it became widely recognized that policy instruments such as input subsidies, output price supports, and trade policy were relatively inefficient mechanisms for supporting agriculture. It was recognized that they also created large distortions in global trade, resulting in several important countries moving away from these mechanisms. This shift was motivated partially by multilateral trade negotiations, which correctly viewed these mechanisms as antithetical to the goal of reducing barriers to international trade and therefore controlled their use. It also stemmed from the desire of national governments to get more for their money. The USA and EU reformed their support systems, reduced these mechanisms' use and began using decoupled payments to farmers, i.e., payments that are not linked to input use or output production. Decoupled support programs have advantages over mechanisms that provide support through input subsidies, output price supports, or trade policy. The payments, in most cases, are determined by the area farmed during a baseline period. Importantly, they do not require farmers to continue to grow any particular crop to receive the payment. Decoupled support programs have many advantages over traditional subsidies or other support mechanisms: They encourage agriculture sector efficiency, since they do not encourage farmers to grow products they cannot grow at a competitive cost or those lacking a market. They thus promote much more efficient use of a country’s limited resources of land, labor, capital, and other inputs. They provide a greater impact on spending, evidenced by ex-post analyses that found an income multiplier of 1.5–2.6 for decoupled payments in Mexico’s PROCAMPO program and a similar impact for Turkey’s DIS program. They assist in budget planning, as the budget required is known in advance and does not depend on uncertain projections of factors such as production or input purchases by farmers. They are classified as ‘Green Box’ subsidies under WTO rules because they cause minimal distortion and are generally acceptable in free trade agreements. They improve the land registration and cadaster systems as a co-benefit. They can reach small, poor farmers. Some farmers growing rice without irrigation in the Philippines use very limited purchased inputs or do not market their output and benefit little from the standard input and output-based subsidies. They can encourage good farming practices. For example, payments can be tied to actions by the farmer that have positive externalities, such as environmental benefits. Some payments are conditional upon satisfying this requirement type in the USA and EU. The government would have multiple options for handling the fiscal cost of this kind of reform . First, the net fiscal cost would be zero if decoupled payments were substituted peso per peso for existing subsidies. If decoupled payments can compensate for eliminating nontariff trade barriers, the government has net fiscal costs. In this case, if tariffs are substituted for the NTBs as was done for rice, this additional 79 revenue can be used to finance decoupled payments. Another option would be to use some of the fiscal savings from phasing out subsidies to finance decoupled payments and channel some of the savings to other forms of spending on public goods. Reducing fertilizer subsidies may be especially difficult under the current high global prices . However, both steps recommended here—using vouchers and decoupled payments—do not necessarily imply that payments to farmers are immediate reduced. Rather, they imply a change in how support is provided. Even decoupled payments can reinforce the message that they are support measures, just like subsidies, but more efficient. When the government of Turkey was under pressure to revert from their decoupled payments to a diesel subsidy, it put in place a diesel subsidy in name, but one administered as a payment per hectare, which was not dependent on actual diesel usage. It was, in fact, a decoupled payment, but its name reminded farmers that they were receiving compensation for the high cost of diesel. Governments and institutions require procedural improvements . Getting the greatest value from public funds requires an efficient and effective process to plan and execute the budget and see how and where the government spends money. In this review, two areas particularly stood out as priorities for attention. Disbursement rates for the DA’s budget are lower than the average fo r the overall government budget and do not seem to be increasing. The failure to spend the funds allocated to the DA greatly undercuts any argument for an increase in its budget during the budgeting process. A comprehensive review of the causes and potential cures for this problem is needed and its findings must be put into practice. Such a review is outside the scope of this study. The diagnostic section above cites findings from a 2014 DBM report on this problem and a review of the Farm-to-Market Road Program, which suffers from particularly low disbursement rates. The fact that low disbursement rates remain a problem suggests that the government has yet to take corrective actions, and this issue still requires priority attention. The review could begin by reexamining the findings of the previous reports, with the hope that its recommendations would be operationalized. Monitoring and evaluation mechanisms need to be enhanced and used more widely . We have previously highlighted shortcomings in the current systems, and M&E mechanisms. Enhanced M&E should be better institutionalized at three critical stages in the budget and planning. First, institutions should use economic cost-benefit analysis (CBA) to select projects and advise policymakers on the effects of proposed programs in the upstream planning stage, including financial and economic analysis. Second, during project execution, mechanisms for continuous monitoring should be in place, including feedback mechanisms to provide opportunities for adaptation in real-time. Finally, monitoring should include more extensive use of ex-post cost-benefit evaluations based on economic value to society. Lessons from the monitoring during implementation and the ex-post evaluations of projects and programs should feed back into the ex-ante cost-benefit analysis and design stage. Reforms in the early 2000s aimed at improving the budget process’ monitoring function and introducing results-based monitoring systems, yet 20 years on, the DA and other agencies are still struggling to implement and use this approach effectively . The DA was one of the earliest departments to establish a results-based framework. Performance targets and indicators cover selected interventions that are not well correlated with the AFMA objectives and outcomes. Each banner program tracks its own progress and has its own databases, with inadequate coordination among them. Such a disintegrated monitoring system cannot produce timely information to support evidence-based decision-making for budgeting purposes. The system needs to be over-hauled to function in a more coordinated and holistic way and to 80 monitor meaningful indicators of productivity, cost efficiency, farm profitability, and environmental sustainability, rather than focusing strongly on production levels and arbitrary targets. The DA informed the World Bank mission that it is currently reviewing its long list of performance indicators to improve the quality of its monitoring. Initial activities have already begun along this line. The department recognizes that the current performance indicators no longer reflect the policy directions and development of the A&F sector. The department hopes to accelerate this post-NAFMIP updating process as the Plan would provide the overall guidance on this effort. As part of this effort, the DA would like to carry out a new agricultural census, which was last carried out in 2012, seemingly a worthwhile contribution to a comprehensive effort to enhance the monitoring and evaluation system. The DA and the LGUs could also take further steps to improve processes for monitoring and evaluation . These would include (a) undertaking a diagnostic or assessment of the PFM system to identify weak areas for strengthening, (b) adopting a results-based approach as a framework for strengthening or installing a new PFM system In compliance with budgeting reforms and standards, (c) establishing or installing an integrated and automated PFM system with DA-wide connectivity and consistent with budgeting, accounting, and audit procedures and standards, and (d) complementing the PFM system with a capability-building program for officials and staff as identified by the DA and the LGUs. Challenge 3: Dealing with Public Expenditure Issues Arising from Devolution A devolved system can facilitate flexibility, responsiveness to local demands and needs, and accountability. Many examples exist of dedicated and innovative LGUs harnessing local resources to support farmers. Yet there are also the challenges of high regional variability and risks if the process goes wrong. In the 1990s, the effort to devolve agricultural services did not go smoothly and was largely reversed. To avoid a similar fate with the current effort and fully realize this transfer’s poten tial benefits, the government must carefully consider which functions to transfer and what capacity building will be necessary for LGUs to carry out newly transferred responsibilities successfully. There will also need to be some mechanism in place to ensure that spending decisions at the local level align with the national interest and strategies. This review has drawn on the rich lessons from the experience of countries such as Ghana, China, and Vietnam, in decentralizing agricultural services and the previous experience with decentralizing extension in the Philippines (Ocenar et al. 2004, summarized in Box 5.2 and Appendix C). This review identified several challenges to decentralizing agricultural services to be successful. Many of these seem to reflect how problems in the earlier episode of devolution of extension services were never resolved (see Appendix C). Other issues seem more contemporary. 81 Box 5.2. Lessons from the Philippines exercise in devolving responsibility for extension to LGUs A retrospective evaluation of the effort to decentralize extension service has lessons that are also relevant for the current transition plans. Some of these key past lessons and findings by Ocenar et al. (2004) are summarized below and detailed in Appendix C: Policies not directly related to devolution per se had a huge impact on its success or failure. Since then, some have been at least partially reformed—for example by the Rice Tariffication Act—but at the time had a major effect and illustrate the general principle that seemingly unrelated policies have significantly impact decentralization. Equating food security with food self-sufficiency skews incentives and encourages environmentally unsustainable farming practices, such as clearing upland forest to cultivate low-value crops. Rice pricing policies and subsidies destabilize and distort the rice market . These subsidies from the National Treasury to National Food Authority (NFA) operations lead to NFA's trading and operating losses. The CARP has created uncertainty, deterred development of a functioning market for agricultural land and discouraged investment in agriculture by disallowing farmers from using their land as collateral, which limits borrowing or selling it, limiting improvements. Many factors delay domestic markets integration for agricultural products from southern islands, including sea and air transport structure, monopolistic seaports control, and cabotage laws, raising interisland transport costs, and continuing inefficient routing. Restrictive financial sector regulations are biased against long-term investments, e.g., tree crops). Combined with inappropriate measures forcing lending to agriculture, i.e., the Agri-Agra Law, they raise costs that then favor real estate development (Hill and Balisacan 2003). Decision-making processes place little weight on negative consequences of policies, due partly to the limited appreciation of their effects in the wider community and the muted voice in decision-making circles of those who are negatively affected. There are also challenges in improving the extension system in the Philippines . A recent independent assessment by the FAO provides some perspective on the current state of extension services two decades after the previous edition (Preissing 2020). Challenges occur on multiple scales. At the highest level, the DA centrally plans agriculture programs and facilities. These are then transferred to the LGUs but they remain underutilized. Partly in response, some Province-led Agriculture and Fisheries Extension Systems (PAFES) have begun to create a hub that orchestrates all stakeholders, e.g., the DA, municipal and city government units, state universities, agencies, private sector, private organizations, and community- based organizations. This hub synchronizes all the agricultural plans and programs, and these province- level efforts offer economies of scale and can reflect more strategic priorities while being closer to the local context. There are currently two piloting projects that started in Ilocos Norte and in Apayao, and three more are expected to join shortly: Quezon, Bohol and Davao del Norte. At the field level, LGU technicians cannot perform their extension work as they lack travel allowances compared to DA regional staff, who have travel support. LGU issues related to spending resources also exist; there is a perennial 82 problem of not liquidating funds on time, potentially due to procurement, which can cause a partial or delayed delivery. There are many major issues that appear to be potentially problematic for the DA to fine-tune and operationalize its Devolution Transition Plan (DTP) in the Philippines. As the DA moves forward with its DTP, it will need to cope with many issues, as did other countries such as Ghana, China, and Vietnam when they decentralized service delivery. These include the following: a) Weak coordination exists between the LGUs and DA in planning and delivering basic services. b) A lack of a results-based monitoring, evaluation and reporting system exists at the LGU level. c) A lack of financial and skilled workforce capacity needed for effective expenditure planning and management exists in many LGUs, especially in the lower income categories. The ability to follow budget rules, manage finances, or even assess their own capability for financial management using the Public Financial Management Assessment Tool (PFMAT) is often missing. d) The LGUs focus on high-visibility expenditures with an immediate political payoff, meaning that rural and agricultural projects tend to get short-changed. This focus on high visibility seemingly occurred with extension services in some LGUs after the previous devolution phase and has also occurred in other countries. This limitation does not bode well for the fate of other services still to be devolved. Part of the problem is that some investments, such as in FMRs and reducing GHGs, have significant positive externalities. That is, benefits accrue to the nation or the world, e.g., by integrating local markets into the national road network or mitigating global warming. Local decision-making on how to allocate funds may not consider these benefits. e) LGU attitudes that continue to free ride on DA funding exacerbates the low budgetary priority for agriculture. LGUs know the department has its own sizable funding, especially for commodity banner programs (Oliveros 2021). These attitudes will need to change. Considering that this traditional division of labor between the central and local governments is entrenched, there may be considerable inertia and changes may be gradual. f) The potential for insufficient funding for LGUs even with the extra financing from the Mandanas Ruling. There is no well-functioning institutionalized mechanism to establish a direct correlation between the extra IRA allocation and the cost of providing the services that will be devolved. At least one study has concluded that the funding—around 16 percent—is likely insufficient for many LGUs to continue to provide devolved services at the same level as currently provided by the national government. LGUs’ heavy dependence on the IRA and t heir limited authority to raise revenue independently exacerbate funding problems. g) The lack of a system for monitoring and enforcing compliance with the LGUs’ commitment , which they must make before construction begins, to maintain long-lived capital investments such as FMRs after construction. The absence of such a system is especially unfortunate since such maintenance neglect leads to much higher costs further down the road. There are ways that the GOP can respond to deal with the issues above in Challenge #3. Here is a summary of the review’s recommendations for steps to help resolve these public expenditure challenges associated with devolution: 83 The DA could retain several functions. Given the current low capacity and motivation of LGUs to effectively carry out functions that could devolve to them, one good option moving forward may be to retain several of the functions of the DA, particularly those of BAFE, at least for the medium term. Functions retained would include coordination and monitoring functions of BAFE on standards and enforcement of policies and other related concerns. It would be sensible to retain the national-level functions that require a critical mass of specially trained skilled staff, including project appraisal, monitoring, and impact evaluation. This action would include the continued development of the Agricultural and Biosystems Engineering Management (ABEMIS) and other tools to capture physical and financial data at the local level to help evidence-based decision-making at the top. A retrospective evaluation of the early devolution of extension services recommended that some functions be recentralized (Appendix C). It may be better to selectively decide which functions to devolve in this round rather than repeat the previous problems. Create a mechanism to ensure that FMRs and other long-duration infrastructure investments receive needed investments in operations and maintenance. This would ensure that they do not continue to suffer from poor maintenance, resulting in high costs. Have the government create a mechanism (a) to monitor each LGU’s spending on O&M systematically, (b) to evaluate whether that is adequate to maintain infrastructure in good condition, and (c) to sanction LGUs that fall out of compliance. Continue capacity-building initiatives for the LGUs, through guidelines, manuals, and guidebooks that are simplified, updated and disseminated to a wider number of LGUs. Using and applying diagnostics tools to complement the capacity-building program must continue. The public financial management Assessment Tool (PFMAT) and the Seal of Good Local Governance (SGLG), meant to measure PFM capacities and systems and incentivize LGUs respectively, are perfect combinations. Adjudicate trade-offs and tensions that arise from LGUs’ lack of motivation to fund agricultural services adequately through institutional arrangements . Decisions need to be based on the best possible evidence of the impacts of investments. For this reason, the government needs to support the continued development of the ABEMIS and other economic analysis tools and those that enable the ex-ante analysis of social and environmental impacts of projects and programs. Any institutional decision-making arrangements eventually established in the devolution process must be based on these tools. The central government may want to consider mechanisms to influence the spending priorities of the LGUs. The following are options for such a mechanism: o An enhanced menu system would list investment programs that LGUs may invest in using the 20 percent budget on capital outlays. This is the current policy for using the 20 percent capital budget but reported underspending may reflect that the menu system has not been effective in providing appropriate options. o An Equalization Fund (EF) could be a grant to provide targeted support to LGUs incapable of adequately carrying out the devolved functions. The fund may be in the form of a conditional grant that can provide a mechanism to influence and direct capital investment priorities. Here, the menu system can be more effective by listing and prioritizing investments with spillover effects outside the LGU jurisdictions, like FMR and road repair and maintenance, among others. One option for FMRs is simply to make FTMRs eligible under the ongoing Conditional Matching Grant to Provinces (CMGP) for Road Repair, Rehabilitation, and Improvement Program, which seemingly does not currently cover FMRs. 84 o A government lending program with an IRA capture mechanism, i.e., automatic deductions from the IRA transfer for interest payment and amortization, could be established. The program’s objective would be to provide an alternative source of financing for LGUs that may wish to undertake additional projects by choosing from a menu of devolved projects and related investments that qualify for the lending program. This form of lending can be regulated and easily controlled by the national government. Subnational governments can borrow from the domestic financial market, though this form of lending is more challenging for the National government; it has to provide loan guarantees, raising the likelihood of over- borrowing and risking the potential rescue of LGUs that fail to fulfill their financial obligations. 85 Appendix A: A Brief History of Earlier Agricultural Service Decentralization Efforts The history of decentralization in the Philippines began in the early 1990s. The 1991 Local Government Code (LGC) promoting the autonomy of sub-regional governments and devolving basic services from national to local government units (LGUs) created challenges as the Department of Agriculture (DA) struggled to revive the A&F sector while dealing with the impact of the devolution. Extension work was disrupted by the transfer of about 12,000 agricultural personnel to the LGUs, leaving the DA with a lack of personnel to facilitate technology transfer and other services and reinforce linkages with the LGUS. On the other hand, the LGUs struggled with their inadequacies. Bottlenecks included the lack of funds, staffing, and expertise, narrowing priorities to the most basic needs of the LGUs, which unfortunately did not give much importance to agriculture. Capability Development Programs and incentive schemes provided by the national government focused on improving management systems but did not emphasize customized and sector-related service delivery. The Focus Group Discussion (FGD) sessions with the LGUs yielded some indications of capacity-building gaps in strategic planning, financial management, project development, detailed engineering, feasibility studies, project management, and other aspects. While incentive schemes were established for many projects, agriculture-related investments were noticeably excluded. However, the DA has shared that they are currently working with the DILG on including agricultural investments under the Seal of Good Local Governance (SGLG) incentive scheme. The Agriculture and Fishery Modernization Plan (AFMP) established a broad initial plan for a five-year modernization program from 1999 to 2004. The DA led the program in coordination with partner agencies and the LGUs, considering the devolution of 1991. The modernization strategies consisted of a holistic and multi-agency approach designed to consolidate, synchronize, and mobilize all interventions toward modernizing the A&F sector under the core principles of food security, sustainable development, and global competitiveness, among others. At the program's core is identifying centers for development called SAFDZs, from which development planning and consolidating value chains for economies of scale are expected to emanate and be distributed to clustered model farms in production areas within and close to the zones. However, zone delineation cuts across political boundaries; thus, the strategy has not been implemented on a larger scale. The DA cascaded the SAFDZ approach for integrated mapping in the LGU Comprehensive Land-Use Plans (CLUPs), but only a few have adopted the approach. Many LGUs have failed to do so, allowing for the premature and unregulated conversion of agricultural lands for other uses, indicating the weak coordination between and among the government agencies concerned, i.e., DA, DAR, and HLURB. Additionally, the enactment of the National Land Use and Management Act, intended to protect agricultural lands from conversion, has been pending in Congress for years. The DA’s responses have taken a different path to address the challenges brought about by the 1991 devolution, the rapid modernization program envisioned by AFMA for the sector, and expenditure management reforms introduced by the national government. Commodity-based programs have highlighted the DA’s strategy for achieving food security, with self-sufficiency as a core policy. Five banner programs showcase A&F service delivery to local farmers and fisherfolk in partnership with the LGUs. At the same time, the mandated DA functions are focused on steering the sector toward food security by providing technical support. These efforts include R&D, extension and training, policy formulation, and regulation. Underfunding, however, has compromised the delivery of these services. 86 The DA saw a direct rice subsidy as the quickest way to improve production yields and enhance farmers’ competitiveness after trade liberalization. Selected clustered model farms with a minimum of 5–10 hectares, comprised of fully irrigated farms for hybrid seeds and rain-fed areas for certified seeds, received high-quality hybrid and certified seeds. Farms owned by individuals or cooperatives received fertilizers, soil ameliorates, farm implements, and post-harvest facilities. The clustered model farms can adopt economies of scale as promoted under the AFMA but reports on the efficacy and status of implementation are not currently available. The soft and hard components of the AFMA, meant to lay the foundation for the SAFDZs, were instead procured and distributed under the different banner programs, discouraging economies of scale and promoting unsustainable and costly service delivery. At the LGU level, the subsidy programs provided a prescription for addressing funding inadequacies, staffing shortages, and low levels of skills and expertise . It was easier for the LGUs to come up with a list of recipient farmers and farmer groups than plan and budget for A&F services that farmers do not consider a priority in many cases. The RSSP, launched as the DA flagship program for food security, productivity, and enhancing the competitiveness of local farmers, continued rice's dominance. Since the Masagana 99 Program to promote Green Revolution technologies, rice has commanded the dominant share of the DA budget, and the RSSP carried over this dominance into the AFMA period. Consequently, the import tariff from the minimum access volumes of agricultural products except rice was constituted into the ACEF for credit facilitation. 87 Appendix B: Calculating the Proportion of Government Budget Devoted to Agriculture How much of the government budget should be devoted to agriculture, and how much to other sectors? What is considered too little and what is enough? The answer is conceptually simple but difficult to put into practice. In principle, to maximize welfare on a given budget, spending should be distributed so that the marginal dollar in each activity yields the same increase in national welfare, regardless of how welfare is defined. If this were not true—if, for example, an additional dollar devoted to agriculture increased welfare more than the incremental dollar to health spending, for instance—then overall welfare could be increased by taking a dollar from health and spending it on agriculture. In a two-sector world—agricultural and nonagricultural—this condition for distributing spending to maximize welfare is mathematically expressed as follows: (1) = Where is welfare, and and are spending on agriculture and nonagriculture. How much welfare is increased by an incremental public dollar spent on agriculture depends on (a) how much that dollar will increase agricultural production and (b) how much the additional production will increase welfare. This optimal allocation condition can be expressed in terms of a ratio of spending in each sector: , (2) = ( ) × ( ) , , Where is the elasticity of welfare to agricultural production, and likewise for non-agricultural production., and , is the elasticity of agricultural production to public spending in agriculture, and likewise for non-agricultural production. The optimality condition in Equation (2) provides a useful framework for considering spending allocations. It says that the optimal ratio of public spending in agriculture versus non-agriculture is equal to the ratio of the welfare elasticity of each sector’s production times the ratio of each sector’s elasticity of production with respect to public spending in the sector. The problem in operationalizing this to provide practical quantitative guidance to policymakers is that it would require empirically estimating all these elasticities in every sector for a given country. There have been attempts to estimate the elasticity of welfare measured by either national GDP or poverty reduction with respect to agricultural production, as well as the elasticity of production concerning public spending, in cross-country samples. There is no strong reason to assume that the elasticities would equal the global or regional average for any given country. To use this to guide policy would require this type of empirical estimation for all sectors. There have been some efforts to provide rules of thumb, which at least seem intuitive and reasonable in the absence of a practical way to rigorously answer the question of how much public expenditure should be allocated to agriculture. For example, De Ferranti et al. (2005) show that with some special and quite 88 restrictive simplifying assumptions, the optimal allocation is such that each sector’s share of spending is its share of national GDP. This index—the share of spending on agriculture relative to agriculture’s share in the economy—has been calculated in several Latin American countries over time to see if there has been a systematic under-allocation or ‘anti-agricultural bias’ in public spending. Findings conclude that, generally, these have not occurred. An alternative approach is to examine the experiences of countries that have undergone a successful agricultural transformation. Analysis of 12 South and East Asian countries during their period of high agricultural growth, the Green Revolution, shows that, on average, these countries devoted around 10 percent of total public spending to agriculture. While many other factors contributed to this success, the level of public support was an important factor. African countries have officially adopted this as their target in the Maputo Declaration. Likewise, they also set a target of spending 1 percent of agricultural GDP on research, about the level that Brazil devoted to EMBRAPA, its very successful research agency, and the spending level on research in some high-income countries. In applying such rules of thumb, it is also sensible to make adjustments based on economic reasoning using Equation 2 above. For example, countries differ greatly in agriculture’s contribution to national GDP, and a 1 percent increase in agricultural production will generally result in a smaller percentage increase in overall GDP in a country where agriculture is 10 percent of the economy than in a country where it is 30 percent. That is, the value of will be smaller in the latter than the former, and so—all other things equal—the share of spending going to agriculture should also be smaller. The elasticity of production with respect to spending (, ) will be higher in countries (a) with high agricultural potential (both because of favorable natural endowments and because the overall policy environment is conducive to a positive supply response) and (b) where the spending is smarter. In such countries with a higher value of , , agriculture’s share of spending should be higher. Source: Correa and Schmidt (2014); De Ferranti et al. (2005), and Hazell (2009) 89 Appendix C: The Importance of the Policy Environment Conclusions from an Ex-Post Evaluation of the Devolution of Extension Services After devolving extension services, a mid-term evaluation of that experience was carried out, drawing lessons that may be useful in the context of the current devolution plans. One important conclusion was that policies not directly related to the devolution had a huge impact on the success or failure of that exercise. Specifically, several features of the Philippine policy environment at that time were thought to potentially negatively affect farmer demand for extension services, which also applies to other services. Some of these features have been subsequently reformed, e.g., through the Rice Tariffication Act. However, they are included here as illustrative of the general principle that seemingly unrelated policies have a big impact. Perhaps the most important over-arching lesson is that, in terms of achieving increased productivity and incomes, the power of extension is shaped as much by farmer demand for extension services as by its supply. Demand, in turn, is shaped by agricultural policies, land tenure security, the financial system’s efficiency, and infrastructure services such as transport, communication, and power. These policy issues are well understood within bureaucratic and academic circles in the country, but decision-making processes appear to place little weight on the consequences of these policies. Such lack of consideration may be partly due to the limited appreciation of their effects in the wider community and the muted voice in decision-making for those negatively affected. The following include other broad lessons learned from the case studies of the 2004 evaluation, as per Ocenar et al. (2004, 225–27): Policies affecting particular crops and products impede efficiency and encourage various damaging and environmentally unsustainable farming practices. These include policies affecting the sugar, banana, and coconut industries. Leadership is a critical factor in the success of a program. The local chief executive, vice governor, or mayor can provide strategic leadership, particularly in sustaining the difficult process of performing the devolved tasks. Besides having the vision and political will to translate these into reality, the local chief executive should commit to pursuing reforms in the delivery of extension services. They should possess a consultative and participatory style of governance and draw widespread support from various stakeholders in developing and sustaining agricultural growth in the community. Strategic direction and a vision crafted through multisectoral consultation at the grassroots level are needed. The vision translates into a specific development plan that shapes and guides the future direction of the delivery of extension services and the development of the agriculture and fishery sector. The plan serves as a blueprint for tapping opportunities and potentials, promoting extensive public participation, and rationalizing allocating scarce resources toward achieving the high-order goal of improving extension services and increasing farmers’ income. Financing the devolved extension services will be a persistent challenge to LGUs , which mostly depend on the development fund for financial support for the broadening array of extension activities, set at 20 percent at that time. The burden of securing funds for the agricultural sector lies in the local leadership, 90 which is expected to constantly seek funds from external sources to augment the meager resources of the LGUs. The involvement of NGOs, the private sector, and SCUs provides insights into the importance of their role in the delivery of extension services. These groups supplement government programs in communities where they are based, thus reaching out to farmers not usually served by other extension providers. Given the opportunity to undertake extension activities, they can initiate ground-working activities and even create opportunities for excellent delivery of extension services. The presence of competent and dedicated extension technologists is needed. The commitment and dedication of the extension technologists toward performing assigned functions could improve and sustain the implementation of devolved extension services. Some of the cases examined were instructive of the need for committed extension workers; those change agents who would be willing to work for the interest of small farmers even though there are low salaries, a lack of incentive allowances, and vague career paths. Personnel-related problems need immediate attention . A confluence of lingering organizational-related issues—unclear organizational structure, inadequate training of support extension workers, low salaries, lack or delayed releases of traveling allowances, and lack of promotion plans—presents a persistent challenge to the delivery of extension workers. Agricultural extension workers feel a sense of dedication if they are properly nurtured and taken care of by their LGUs. Salaries and incentives are good motivators for hard work. Establishing a clear career path, attendance in training programs, and minimization of red tape and other irregular practices are also important. Coordination among extension providers leads to the synergy of efforts. Active linkages among various national and private extension providers are important in mobilizing support and resources. Working together can provide an opportunity to chart the efficient and strategic use of resources and widen the reach of beneficiaries while minimizing overlaps. Workable strategies can make a difference. These include monthly meetings with municipal agricultural officers which serve as an avenue to thrash out crosscutting issues and concerns and to synergize innovative extension programs; establishment of farmers’ information and technology service centers at the provincial and municipal levels to help farmers access relevant information on new agricultural programs and technology; focus on farm-system and farmer-led extension approaches, with focus on farmers and not on the farm or the commodity; pioneering and strengthening farmer associations, themselves catalysts for improving delivery of extension services, venturing into new and scientific methods of farming, attending seminars, and sharing knowledge with each other with regard to their actual farming experiences; availability of various extension modalities including demonstration farms; farmer field schools, farm and home visits, study tours, farmers’ classes, caravan, training, information materials, and advisory services; research and extension interface manifested by a large number of technologies disseminated to farmers and fisherfolk that are developed by region-based national agencies and academic institutions; and perhaps also increasing use of co-payments for service covering seeds, fertilizers, water, and fish breeding stocks. Well-organized extension programs of the DA and attached agencies restrict LGUs’ efforts to initiate their own extension programs. The LGUs largely merely adopt and implement agriculture programs of DA, an arrangement that involves less expense. All devolved personnel spend a big part of their time 91 providing technical support to DA programs. The DA has designated all devolved personnel as implementers of its Ginintuang Masaganang Ani Rice and Corn programs at the local level. Devolution can bring good results. The strategy of delegating powers and responsibilities to LGUs provides opportunities for providing responsive and high-quality services and the possibility of strengthening accountability and extensive public participation in the delivery of extension services. This appendix has focused on the specifics of agricultural extension, but the World Bank also provides a broader discussion on the era of the Philippine decentralization (2004). Beyond the important Philippines case, wide-ranging extension devolution experience is critically assessed by several agencies, including the FAO (2002, 2005, 2006, 2009, 2018 [and an unpublished 2020 Philippines-focused assessment]), IFPRI (2021) and, especially regarding SNG capacity building, OECD (e.g., 2020). 92 Appendix D: Devolution Case Study Devolution in Ghana: A Well-Studied and Instructive Case Ghana began pursuing the devolution of functions and responsibilities from the central government to the country’s 216 Metropolitan, Municipal, and District Assemblies (MMDAs) in 2009. Several years into the experience, Danielle Resnick and her Team at IFPRI carefully analyzed the accumulated experience. A survey assessed 960 rural households, 80 District Directors of Agriculture (DDAs), and district-level budget data from 2012 to 2016. Analysis of these data led to a series of publications beginning with Resnick (2018). Several positive benefits of the transition for DDAs were found, including more opportunities for employment mobility and the chance to engage more with local citizens in designing agricultural projects. There are lessons for the Philippines as it devolves further in its response to Mandanas imperatives and pursues its ambitious national objectives of modernizing agriculture. Citizens embraced accountability while identifying funding as an overarching constraint. The study found a strong belief that this has worsened since devolution. Results found that staffing, equipment, and services were negatively affected. Agricultural expenditure in absolute terms and as a proportion of agricultural households has declined in Ghana, even compared to other devolved sectors. Assembly members in Ghana tend to prioritize other sectors with more visible outcomes, such as infrastructure, education, and health services. Decentralization initiatives may cause agriculture to become sidelined if local politicians perceive that allocating too much money to agriculture may not be as electorally rewarding as if distributed to health, public works, or education. In Ghana, agricultural expenditures under increased devolution have, on average, declined. In contrast, other sectors’ expenditures have either stayed constant or increased over time. The challenge has been respecting local governance priorities and autonomy without forfeiting national agricultural policy objectives and avoiding policy inconsistency. Can the Philippines learn from this decentralization effort beyond its considerable devolution experience? In particular, there is a question as to whether the Philippines need to devolve some elements of its effort to implement the contemporary agricultural development strategy only to levels that can effectively implement advance on the agreed “Consolidation, Modernization, Industrialization” strategy (World Bank 2020, 33, Figure 21). Perhaps participation in this PER can assist in answering this important question. The Ghana case suggests devolution is not at fault per se but broader intergovernmental fiscal frameworks. Disbursement time lags need to be addressed better. DDAs would seemingly benefit from budget and management training. The study reports in Further Reading suggest approaches for ensuring service provision to avoid citizen disillusionment with devolution (Bonal J., undated, ca. 1999). 93 References ACIAR, IFPRI, and ASTI. 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