“Building an Open Public Value Chain”
Opening Remarks for the High-Level Dialogue on Fiscal Transparency
by Cesar V. Purisima, Secretary of Finance, Philippines
Open Society Foundation, Pennsylvania Avenue, Washington DC
April 15, 2016 / 1:00 PM – 3:00 PM

Event co-hosted by the Department of Finance, Department of Budget and Management, Emerging Markets Investors Alliance, the United States Department of the Treasury, the Fiscal Affairs Department of the International Monetary Fund, and the International Budget Partnership

Fellow Ministers, Co-Hosts, and Colleagues, good afternoon.
The last five and a half years has been the best time for our country’s economy in the past forty years. President Aquino, who ran on and pushed the agenda of good governance, has improved the structural growth capacity of our country. One of the driving forces of these improved results is the improved fiscal situation and fiscal transparency.
Fiscal transparency is critical not only to investors who will be the market of USD 65 billion in emerging market bonds that are estimated to be issued this year, but to governments who want to fulfill their social contract with the people they serve. In certain studies of emerging economies, transparency was cited as positively correlated with higher credit ratings and lower borrowing costs. But for transparency to be effective, it must not only be treated as an act in isolation; transparency and openness must be an attitude for reform.
In the case of the Philippines, transparency became valuable when it was used to generate insights, design policy actions, and open feedback loops for the public to participate in our reform programs. Our leadership philosophy is this: we must be the first to point out our areas of weakness so we can work at strengthening these with the people we serve.
If there are value chains for businesses, we must look at government reforms through the lens of a public value chain, of which transparency is just the first step. We view them with the end in mind: Open Data must evolve into Open Insights, Open Actions, Open Evaluations, and Open Participation. Politics is critical to building and growing confidence in this open public value chain. I served as the Secretary of Finance under two different presidents and my two terms yielded very different results. It is like night and day: President Aquino, believing that good governance is good economics, prides himself in being a “fiscalizer” who can take the long view on fiscal reforms, instead of yielding to short-term populist measures. As a result, our country, which used to be called the Sick Man of Asia, has gone out of a vicious cycle into a virtuous cycle supported by strong macroeconomic fundamentals and fiscal prudence.
This public value chain framework can be seen through our budget process. Before, when budgets were not passed on time, the previous year’s budget was re-enacted. Mid-year changes to these budgets were opaque and rarely reported. Under President Aquino, our budget was passed on time for all of his six years in office. Open Data has given the public access to more than 2,000 data sets, including specific information on schools, roads, taxes; and now, Open Insights can be generated from budget data in file formats that can be easily analyzed by the public.
Our Zero-Based Budgeting approach means that we do not base our National Budget on whether budget items were funded in the previous year. Agencies are required to show that these projects are needed ever year. Open Actions and Open Evaluations can be seen through our Performance-Informed Budget reforms. For budget accountability, agencies are now required to inform the public about their reform commitments and performance. For example, to get their budget, our Department of Social Welfare and Development needs to report that they have covered 4.6 million families under our conditional cash transfer program, our Department of Public Works and Highways needs to disclose their target of building 31,242 km of national roads, our Bureau of Immigration needs to disclose that they commit to processing 99% of entries and exits within 40 seconds. It is now possible to match resource allocation with performance.
The results of this open public value chain are clearly positive for our people. A regression analysis shows that the government’s capital outlays during the more transparent budget regime of the past six years was more highly correlated with GDP growth (with a coefficient of 0.88), than that of the previous ten years spanning July 2000 to June 2010 (with a coefficient of 0.72).
Transparency has not just yielded growth; it has also yielded better competition and wider fiscal space. Because of procurement transparency and competitive bidding, in 2015 alone, our public works department saved P6 billion (USD 130 million) in costs of building roads and bridges. Requiring agencies to post bids at our Philippine Government Electronic Procurement System (or PhilGEPS) website save us least P58 million (USD 1.3 million) in advertising costs every year. Our General Appropriations Act-as-Release Document reform facilitated the release of funds without the need to issue individual allotments. For appropriation items that really need individual clearance for release, we set clear conditions and guidelines and removed a significant degree of discretion to avoid opportunities for corruption. This allowed us to triple the release rate of our total budget in the first month of the year from 23% in January 2010 to 64% in January 2016. Because we removed the need to issue an additional release order from our budget department and implemented the policy of conducting public bidding activities short of award, our agencies can now obligate contracts and implement projects and programs on the first day of the fiscal year. This saved us 3 to 4 months in the procurement process and allowed us to spend quicker on critical social programs. Our spending in full year 2015 was 13% faster than the previous year as a result.
Furthermore, openness has allowed the public to openly participate in the crafting of the budget. Our Budget Partnership Agreements have allowed urban poor communities to add P1.3 billion (USD 30 million) worth of programs to the budget of our National Housing Authority. Our Bottom Up Budgeting program allowed 30,408 civil society organization (CSO) representatives in 1,514 local government units nationwide to participate in developing local poverty reduction action plans. In 2016, 14,324 Bottom Up Budgeting proposals amounting to Php 24.7 billion (USD 500 million) were funded under the National Budget. For example, through the BUB, a poor community in Mindanao now has access to potable water supply, resulting into a dramatic reduction of skin and water-borne diseases in the municipality. Because this approach has been proven to work, this year, we are expanding BUB to our most basic unit of government: the barangay. This year, we launched Barangay Bottom Up Budgeting to cover programs of 12,000 barangays in preparation for the 2017 Budget. By 2019, all 42,036 barangays will be covered.
We also applied the public value chain approach to our revenue reform programs. We estimate that every year, the Philippines loses P200 billion (USD 4 billion) from smuggling and P400 billion (USD 8 billion) from tax evasion. Our approach is a bias towards regular execution: we manage our bureaucracy like clockwork through weekly or monthly deliverables. Through Open Data, we release import-level data for customs every month, release incisive Open Insights through newspaper ads every Wednesday, and Openly Act on these insights by filing tax evasion, smuggling and anti-corruption cases every Thursday. We allow the public to Openly Evaluate and Participate in this work by anonymously reporting errant employees and businesses through our Pera ng Bayan website. Since 2013, we have released more than 100 “Tax Watch” ads which identify importers that undervalued goods at customs–like undervalued trucks worth only P83,000 (USD 1,800) and cans of SPAM costing P5 (USD 10 cents). Through regular analyses of a special unit which we created in 2012 called the DOF Fiscal Intelligence Unit, we discovered that 1 in every 10 lawyers in several key cities declared zero income tax and that certain rich celebrities that did not file tax returns. As a result we improved tax collections from self-employed professionals, like doctors, by 14%, a collection improvement equivalent to the salaries of 21,000 additional public health nurses. Over the past six years, our weekly Thursday cases have resulted into more than 420 tax evasion cases and 200 smuggling cases covering P100 billion (USD 2.2 billion) in duties and taxes. Through a new law, the Tax Incentives Management and Transparency Act, for the first time, more than P144 billion worth of tax breaks (USD 3.2 billion or 1.4% of GDP) will be reported in our National Budget, and the public will have a chance to critique our overly generous tax incentives regime.
We have also applied the principle of transparency to our local treasurers. In 2012, 30% of our 1,700 local treasurers from cities, provinces, and municipalities did not submit financial reports. But when we started publishing the names of errant treasurers and when we wrote to each of them about their violations and possible sanctions, reporting compliance improved to 99.5% in 2015. Over the past six years we have effectively doubled locally sourced income from P75 billion in 2009 to P140 billion in 2015 (with 15% growth in 2015 alone, which was the year we ramped up our monitoring and transparency efforts). We use this reporting compliance as a basis for promoting local treasurers, along with their scores on local treasurer exams which we conducted last year. Notably, only 16% of our local treasurers and assessors passed our basic competency exam. We will use this individual assessment data to design learning interventions to professionalize our local treasuries. Again, here we see the public value chain framework at work.
Government recruitment has also been more transparent. Through an initiative by young public servants in our department, we partnered with a jobs matching startup called Kalibrr. So far we have posted 4,000 government posts from 14 agencies and received 60,000 applications, making government vacancies 15 times oversubscribed. It is no longer true that no one wants to join government.
As a result of this public value chain approach, we got an investment grade rating for the first time in 2013 on the back of improved revenue generation, better debt management, and budget performance. And this virtuous cycle continues to positively impact the money our citizens hold: we estimate that because of lower borrowing rates from greater market confidence, we have saved companies P52 to P157 billion (USD 1.2 – USD 3.5 billion) in interest payments from corporate loans from 2009 to 2014, we have saved consumers P23 to P68 billion (USD 0.5 -1.5 billion) in interest payments from consumer loans from 2006 to 2014, and we have freed up government’s fiscal space by P118 billion (USD 2.6 billion) from 2011 to 2014. Our interest payments as a percent of the budget decreased from 33% in 2005 to 14% in 2015, improving our ability to spend more of our budget on productive social expenditures. Wider fiscal space over the past six years has allowed us to invest in our people: we have doubled our education budget, doubled our infrastructure budget, tripled our health budget, and increased our social welfare budget by at least six times.
We firmly believe that transparency breeds confidence, increases accountability, and improves public service results. Transparency is the first step to building a country’s public value chain, and I invite fellow governments to take this first step with us.
As I close this speech, I would like to float these questions to my fellow finance ministers which we can discuss at the appropriate time: What are the types of political and technical challenges that you (other ministers of finance) face in introducing fiscal transparency reforms and what external assistance, if any, might be helpful in overcoming these obstacles? And to investors and credit raters who are here: Are there specific types of fiscal data and systems that you look out for when you assess a country’s creditworthiness?
Thank you.