Making Aid More Effective: Lessons from the Philippines

November 30, 2011

By Jaime Faustino

As thousands of development experts and leaders gathered this week in Busan, Korea, for the Fourth High-Level Forum on Aid Effectiveness, The Asia Foundation has just published a book featuring case studies from the Philippines that focus on many of the most critical development challenges being raised in Busan.

The book, Built on Dreams, Grounded in Reality: Economic Policy Reform in the Philippines, examines both successful and unsuccessful reforms in order to draw lessons from those experiences. The five highly regarded reforms include: introducing competition and liberalization in three sectors (sea transport, civil aviation, telecommunications); privatizing water service in Metro Manila; and passing a property rights law to allow faster titling of residential lands. The book also documents two long-running reform efforts with limited success: improving tax administration for better fiscal outcomes, and reforming the National Food Authority, a government corporation responsible for ensuring food security, particularly the stability of supply and price of rice.

A number of regularities that can inform development thinking and practice emerged from the cases:

1. Institutional change is an iterative, non-linear, and context-specific process. Successful reform involves the embedding of technically sound policies within the murky and ever-shifting world of politics and coalitions. While the process is protracted and unpredictable, it can be influenced to produce positive development outcomes. The case of civil aviation provides an excellent example of this iterative process. In the initial years of the Arroyo administration (2001-2004), liberalization advocates were appointed onto the national policy body, the Civil Aeronautics Board. However, the elections of 2004 changed the policy environment when the owner of the dominant carrier is alleged to have supported the president’s election bid. In an effort to continue reform, advocates shifted strategies by combining the “open skies policy” with a political base from the president’s home province of Pampanga where there was a major airport, Clark Airport, a former U.S. military facility. Over time, an aggressive liberalization policy emerged that unleashed the development of the airport. From a low of 50,000 passengers in 2004, the airport handled about 700,000 passengers in 2010.
2. Technical and political dimensions play equally important roles for achieving reform.There is a universe of reforms, some of which are technically sound, and others politically possible. Each reform case sought the elusive option that is both technically sound and politically possible at specific moments in time, and at critical junctures amid the seeming chaos. Discerning this elusive combination is an iterative process that combines three reform elements: technical analysis, political economy analysis, and political action. An example is the introduction of the Roll-on, Roll-off(RO-RO) policy in 2003.Initial analysis pointed to the need for the regulator to undertake a “cost-based study” to determine cargo handling rates. While technically sound, it did not take into consideration the political economy dimensions. The regulatory agency actually shared part of the revenue from cargo handling rates and therefore had an incentive to annually raise rates. To counter this, reform advocates developed a broad coalition of users and transformed the issue into a national concern to be resolved by the president. In 2003, President Arroyo issued the RO-RO policy. In hindsight, it is evident that the 2004 elections played a major role in the policy reform. As a result of the policy, domestic shipping costs have been reduced by 20 percent to 60 percent on key routes. One major multinational reduced its warehouse network from 36 to 3 over a 10-year period because the trucks can hop from island to island and have been transformed into “rolling warehouses” due to RO-RO.
3. Political action is a critical ingredient for institutional change.Political action includes negotiating the complex socioeconomic and political terrain of reform, supporting coalitions, and aligning various interests toward the achievement of the developmental outcome. The goal of political action is to convince those with political capital to spend it on technically sound, politically possible solutions.The case detailing the introduction of a new property rights law, the Residential Free Patent Act, highlights the centrality of political action. In the Philippines, there are about 24 million parcels of land, of which close to half (46 percent) are untitled. Of the untitled, about 7.8 million parcels are residential. Occupiers often hold only tax declaration certificates, which cannot serve as collateral for bank loans.The case study recounts the beginnings of the effort to unleash this capital, the people who bought into the idea, and various dead ends that were encountered. This involved crafting an alternative, more politically feasible – if less ambitious – reform objective which diminished the ranks of the opposition and produced an alignment favorable to change. The narrative emphasizes the importance of political mapping of potential friends and foes, coalition building among those of kindred interests, the use of networks built in the past for other purposes, cashing in reciprocal obligations for past favors, the deployment of teams of experts with detailed knowledge of the inner workings of the land titling and legislative processes, and the role of determined individuals who kept the fire burning in lean times.The law creating an administrative procedure for the titling of residential lands was signed in March 2010. In turn, the development outcomes are emerging. Already in the first three quarters of 2011, the government has issued 20,000 titles. This has already matched the number of titles issued in the previous four years.
4. Committed local leadership is the principal driver of reform. In all cases, there are individuals, whom we refer to as development entrepreneurs, who took responsibility for the reform challenge and for seeing to the achievement of the outcome. The privatization of the government-run Metro Manila water concession provides an example of local leadership. President Ramos, apprised of the possibility of private provision by foreign players interested in acquiring and running the water service in Metro Manila, became its chief advocate. President Ramos got the Legislature to pass a law, the Water Crisis Act, which allowed difficult decisions to be made. The help of the International Finance Corporation (IFC) in the preparation of the bid papers and the concession contract was critical. Aggressive reduction of the manpower complement by 30 percent, and a substantial increase in the water tariff signaled credible commitment by the government. The appointment of a very credible administrator with a mandate to privatize the agency reinforced the signals. As a result, the private sector bidders flocked to bid aggressively, resulting in a spectacular discount and dramatically improved service for consumers.
5. Development agencies play a critical but supporting role in achieving reform. Some of the successful cases point to a promising project structure that allows development agencies to increase aid effectiveness and manage institutional risks. In that structure, development agencies work with intermediary organizations and local partners through flexible, outcome-oriented grants.

Instead of a long and rigid work plan, the grant project structure allowed local partners to identify, develop and implement strategies and activities with broad goals identified. As such the realities of context, politics, and incentives can be incorporated. The project structure has led to significant policy and development outcomes such as the liberalization of civil aviation in Clark and the introduction of the residential land titling program. Equally important, the project provided supported to legitimate local civil society partners who independently determined the reform agenda.

The Busan discussions are helping to bring much-needed attention to these new approaches to development. We hope that some of the lessons from successful reform in the Philippines can shape this global conversation.

Jaime Faustino manages the Economic Reform and Development Program in the Philippines. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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