CHALLENGES AND OPPORTUNITIES FOR

FISCAL AUTONOMY in MUSLIM MINDANAO:

A Report on the Workshop conducted by the Philippine Center for
Islam and Democracy (PCID) and the Foundation for Economic
Freedom (FEF) sponsored by the Australian Government

Presented by Amroussi Rasul during the third series of Muslim Mindanao

Autonomy Roundtable Discussions held at the Committee Room 1 of the
Senate of the Philippines (July 13, 2015). The series is organized by the
Institute for Autonomy and Governance (IAG), Local Government
Development Foundation (LOGODEF), Senate Economic Planning Office
(SEPO), and Senate Muslim Advocates for Peace and Progress (Senate-MAPP)

A.

Achieving fiscal autonomy will be critical for overall autonomy to be

effective. But this will not be enough. Institutions and capacity need to be
in place to ensure that fiscal resources are:

mobilized efficiently and with transparency and accountability; and

spent wiselyalso with transparency and accountabilityand reflect the

needs for sustainable and inclusive growth in the region.

B.

Weak fiscal management has been a principal underlying factor in the

failure of Autonomous Region of Muslim Mindanao (ARMM) to effectively
perform as an autonomous region . This is attributed to:

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

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

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

D. The politics of local tax collection is a handicap.

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

E. Budget processes in the ARMM are fragmented and complicated.

According to the DFAT Australia-World Bank Report 2014, there is no
single budget
document or process [that] comes close to including the
bulk of resources to be used in ARMMmaking it difficult to integrate the
ARMM-RG budget processes with the national budget processes and
making it difficult to promote a coherent set of policy goals through budget
allocationsthese weaknesses apply to budgetary execution
arrangements, as well as to planning.
The fragmentation also makes it difficult to integrate the budgets with the
overall development plan for the ARMM region.

E. Budget processes in the ARMM are fragmented and complicated.

Aside from the mismatch in the ARMM-RG linkage to the NG budget
process, there is a lack of:
a regional budget law or a department responsible for budget
preparation and management;
sound budgeting processes among the ARMM institutions; and
skills and institutional capacity for effective program and project design,
and budget preparation and execution.
and as also apparent at the national level, procurement processes are
often long and tedious, and the budget release processes complicated.

F. ARMM has a history of poor governance and accountability.

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

F. ARMM has a history of poor governance and accountability.

however, as pointed out in the DFAT Australia-World Bank Report, the

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

ROAD MAP FOR AN ACTION AGENDA FOR FISCAL AUTONOMY AND

MANAGEMENT

A three pronged strategy is required:

a more serious effort to ensure fiscal autonomy within the Bangsamoro

through appropriate revenue and other financial resource mobilization
measures;

putting in place a budgetary system which leads to more efficient,

accountable and transparent fiscal management; and

a systematic effort to build institutions and capacities to underpin the

resource mobilization and budgetary system measures.

Improved Revenue Mobilization

Improved Revenue Mobilization

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

levying taxes and charges as per those already devolved to ARMM;

haring of central government taxes, fees and charges collected in

Bangsamoro (other than tariff and customs duties) 75% (100% for
limited time);
sharing of revenues from natural resources (100% non-metallic, 75%

metallic, 50% fossil fuels);

Improved Revenue Mobilization

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

Improved Revenue Mobilization

A serious effort by both the Bangsamoro-RG and LGUs to generate own-source

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

Improved Revenue Mobilization

The Bangsamoro-RG should also explore with LGUs:

the most appropriate use of tax and non-tax incentives (within the scope
delegated to the Bangsamoro-RG and LGUs) to encourage investment and job
creation, recognizing the need to keep this transparent, performance based, and
temporary, given their fiscal implications;
means to improve land administration and updated valuations, providing the
basis for increased revenue through property taxes;
ways to simplify business procedures to encourage currently unregistered
businesses to enter the formal sector, and thus expanding the potential tax base;
the adoption of a more open trade policy and investment policy to legalize
informal trade;

Improved Revenue Mobilization

The Bangsamoro-RG should also explore with LGUs:

mechanisms to institutionalize the implementation ofZakat for those who
can afford it, perhaps making it tax deductible; and
means to foster a culture of paying taxes, which could include the
conducting of pulong-pulongs in barangays to help them better
understand taxes and how they are used.
A directory of available non-tax funding sources (including ODA), and
the conditions under which these fund could be accessed, would be
helpful.

Improved Revenue Mobilization

The principal focus of the Bangsamoro-RG and LGUs over the near future should be
on spending their Internal Revenue Allocations (IRA+) from the National Government
and other available fiscal resources wisely -supplemented with policy actionsso as
to enhance investment and stimulate growth, particularly by the private sector.

This focus will ultimately lead to:

more jobs and reduced poverty;

a more robust, formal, private sector; and

an expanded tax base.

As the tax base expands, so will local revenues, and so will the potential for fiscal
autonomy. Underpinning the wise spending of fiscal resources will be sound and
transparent budgetary and accounting processes.

The exploitation of natural resources, particularly mining, offers an

opportunity to achieve real and lasting fiscal autonomy in the Bangsamoro.

The exploitation of natural resources, particularly mining, offers an opportunity

to achieve real and lasting fiscal autonomy in the Bangsamoro.

The Bangsamoro-RG will have to clearly articulate its position on

mining (and oil and gas) exploration and development. This will
require the formulation of an appropriate policy framework, which
should be a joint exercise with the National Government, to set the
basis a legislative and institutional agenda.

The exploitation of natural resources, particularly mining, offers an opportunity

to achieve real and lasting fiscal autonomy in the Bangsamoro.

In formulating the policy framework, the Bangsamoro-RG should:

emphasize its commitment to responsible and sustainable mining, and
articulate clearly the environmental and other critical guidelines for the
sectors development;
spell out the responsibilities of the National Government, BangsamoroRG, and Bangsamoro LGUs in the identification and approval of mining
projects, ensuring the harmonization of policies and procedures while
recognizing the respective legal mandates;
clearly differentiate the approach to exploration and exploitation of
mineral resources;

The exploitation of natural resources, particularly mining, offers an opportunity

to achieve real and lasting fiscal autonomy in the Bangsamoro.

In formulating the policy framework, the Bangsamoro-RG should:

indicate its intent to engage the private sector in both the exploration and
exploitation of the mineral resources, recognizing that different parties may
be involved in each of these stages;
specify steps to regulate small-scale mining;
consider creating an agency mandated to overseeing the development of
natural resources, and a separate agency to take care of environmental
protection; and
consider a Bangsamoro sovereign wealth fund for stabilizing mineral
revenues and sovereign wealth bonds.

The exploitation of natural resources, particularly mining, offers an opportunity

to achieve real and lasting fiscal autonomy in the Bangsamoro.

As also highlighted in the workshop on land and property rights, the

challenge will be to set or negotiate terms that reflect the true value of the
resources, while recognizing:
the costs and risks to potential investors associated with their extraction
in a post-conflict region;
the need to ensure responsible management of environmental and
social impacts; and
the necessity to ensure that impacted areas get a fair share of mining
revenue.

Sound and Transparent Budgetary and Accounting Processes

Sound and Transparent Budgetary and Accounting Processes

The Bangsamoro-RG needs to strengthen and realign the budgetary

processes currently in place so that they integrate more effectively with
other plans for the region for the mobilization and use of financial resources,
and ensure transparency and accountability in the use of funds.

This re-orientation needs to build in a longer-term orientation to the budget

process, so that it is not focussed purely on the short-term as has been the
common practice. It should also clearly link revenue, expenditure and debt.

Sound and Transparent Budgetary and Accounting Processes

Programs of the sector agencies, as reflected in their expenditure programs

and budget requests, should support the Bangsamoro regions plans and
relevant national requirements, and reflect a programmatic approach to
budget preparation.

Sound and Transparent Budgetary and Accounting Processes

The regional and national budget systems should be integrated as appropriate through
the adoption of a regional performance budgeting framework suitable to the
Bangsamoro region and acceptable to the national government.
This could be a modification of the current national OPIF framework to ensure a

simple and limited results-based program budgeting framework that integrates the
activities budgeted by the Bangsamoro-RG and its agencies and appropriate
national agencies, and relates them to an agreed set of indicators. Such
performance indicators will also be a requirement of national and international
funding institutions supporting projects in the Bangsamoro.
This framework should be extended to include responsibilities and reporting

requirements of the regional LGUs

Sound and Transparent Budgetary and Accounting Processes

Delineated accounting and auditing systems should be put in place to promote transparency and
accountability in the receipt and utilization of funds from all sources. This will require:putting in place
transparent and simplified procedures for procurement and fund disbursements;
developing a framework for a unified accounting structure, and horizontal and downward monitoring
and accountability in the use of public funds and service quality, which would include public reporting
and citizen scrutiny; and
establishing a Bangsamoro auditing body staffed with competent officials and adopting transparent
procedures, with auditing responsibility over the utilization of public funds within the Bangsamoro,
ensuring appropriate relationship to the National Commission on Audit on the use of national funds.
In all aspects of budget preparation and execution, advantage should be taken of the benefits of
information technology in service delivery, process improvement, and transparency.
The implications of the Islamic business transactions and use of Islamic financial tools will also have to
be considered once these take hold within the Bangsamoro economy

The role of GOCCs, PPPs and Economic Zones in the Bangsamoro

Government owned and controlled corporations (GOCCs), public-private partnerships

(PPPs), and Special Economic Zones (SEZs) will also have a role to play in the
Bangsamoro.

There may be scope for a limited number of Bangsamoro-RG GOCCs in some critical
niche areas where they can:

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

The role of GOCCs, PPPs and Economic Zones in the Bangsamoro

There will be scope for PPPs in a number of areas, but these should also be approached with
caution.

Some of these could be in critical infrastructure projects, such as airports and seaports.
Innovative approaches will be required in some sectors, particularly where it involve Islamic
financing and/or interacts with critical private sector projects, such as those in large commercial
plantations and mining.

Some may be quasi-private, in that they are projects that in normal circumstances would be
purely private sector, but require a transitional period with government involvement until the
security situation stabilizes and throughput enables them to be self-standing. These could be
critical commercial supply chain projects (such as cold storage and post-harvest facilities) for
certain crops.

The role of GOCCs, PPPs and Economic Zones in the Bangsamoro

Special Economic Zones (SEZs) offer an immediate means of providing streamlined

procedures and incentive to private enterprises in the Bangsamoro. Further, security
can be more-or-less assured and basic infrastructure can be more readily put in place
in these zones. And these zones can be expanded as security improves.

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

Effective Institution and Capacity Building

Effective Institution and Capacity Building

Designing and implementing all the above the actions hinges on the ability
to have in place the necessary institutional and manpower capacity. In this
respect, it is critical to have:
enlightened and competent leadership;
a lean and mean government;
an empowered and competent bureaucracy with clear responsibilities
and accountability;
transparent and streamlined procedures;
results based management systems; and
governance enhancement of the private sector and general public.

Effective Institution and Capacity Building

While the focus in the near term should be on maintaining the momentum of ongoing
capacity building support, some very basic actions relating to the organization and
governance structure should be undertaken:

establish the basis of the cabinet structure and plans for expansion, such as by first assessing the
institutional needs and choosing only those Ministries and other official entities deemed appropriate to meet
these needs;

determine the public service provision roles and responsibilities of the Bangsamoro-RG (i.e. ask whether to
provide alone, through GOCCs, through PPPs);

review existing national government systems and regulations and revise to suit the local context and ARMM
experiences (especially for accounting audit);

determine the role and responsibilities of organizations/offices that will be set up in the Bangsamoro vis-vis counterparts in in the national government and LGUs;

establish an ODA/FAP management office to ensure these are complementary and avoid overlaps, and
ensure that the Bangsamoro-RG remains in the drivers seat; and

establish regulatory structures for the inflow of private financing.

Maraming Salamat!