GROWTH OF GOCCs

RA 10149 – otherwise known as the Governance Act of 2011

An act to promote financial viability and fiscal discipline in government-owned or controlled corporations and to strengthen the role of the state in its governance and management to make them more responsive to the needs of public interest and for other purposes.

This act is part of the present administration’s drive to minimize graft and corruption in the government service. It created the Governance Commission for Government Owned or Controlled Corporations (GCG) as central advisory, monitoring and oversight body with authority to formulate, implement and coordinate policies concerning GOCC’s and other related corporations.

SALIENT FEATURES OF RA 10149

1. Performance Review - Creation of Governance Commission for GOCCs which shall be composed of five members – the chairman with the rank of Cabinet Secretary and two members with the rank of Undersecretary appointed by the President; and the Budget and Finance Secretaries as ex-officio members. The GCG will review the performance of GOCCs.

2. Restitution and Prosecution of Corrupt Public Officers – any board member or officer found to have benefited from the GOCC excess benefit or profit shall be subject to restitution without prejudice to any administrative, civil or criminal case.

3. Salaries and benefits are rationalized – Rationalization of salaries and benefits of officials and employees of government-owned and controlled-corporations to curb abusive perks and based on their performance with regard to financial capability of the GOCC.

4. New Job Positions and Classifications of GOCCs – The development of new positions and classification system that will apply to officers and employees of GOCCs, whether covered by the Salary Standardization Law or exempt from it. All GOCC personnel shall be paid just and equitable wages in accordance with the principle of equal value.

5. One Year Term Limit of CEOs – The Chief Executive Officer (CEO) or the highest-ranking officer provided in the charters of the GOCCs, shall be elected annually by the members of the Board of Directors/Trustees from among its ranks. The CEO shall be subject to the disciplinary powers of the Board and may be removed by the Board for cause. CEOs refer to the highest ranking corporate executive who could be the President or the General Manager, Chairman or the Administrator of a GOCC.

6. On-line Transparency - All GOCCs are required to maintain a website that will be open for public viewing containing their financial statements, corporate operating budgets, summary of borrowings and other information that the GCG would require.

MANDATE OF GCG

1. Establish a performance evaluation system that shall apply to all GOCCs. The CGC will work closely with the task force organized under AO 25, S-2011, which will simplify, harmonize and boost the monitoring and reporting systems on the performance of national government office.

2. Develop performance scorecards for each GOCC recognizing that the mandate of each is unique. Metrics to be used will be able to measure 5 Key Perspectives namely: social impact, stakeholders, finance, internal processes, and learning and growth. The CGC will sit down with each of the Boards to establish a set of measures, targets and initiatives that would facilitate the achievement of breakthrough results. There will also be consultation with supervising departments to ensure consistency with their respective plans.

3. Coordinate and monitor the operations of GOCCs, ensuring alignment and consistency with the national development policies and programs.

4. Review the functions of each GOCC and, upon determination that there is a conflict between the regulatory and commercial functions of a GOCC, recommend to the President in consultation with the Supervising Department or Agency the privatization of the GOCCs commercial operations, or the transfer of the regulatory functions to the appropriate government agency or such other plan of action to resolve institutional conflicts of interest. Some of the GOCCs that fall under this category and will therefore be reviewed immediately by the GCG include the Manila Water and Sewerage System (MWSS), Local Water Utilities Administration (LWUA), Philippine Amusement and Gaming Corporation (PAGCOR) and the Philippine Ports Authority (PPA).

5. Evolve a Compensation and Position Classification System (CPCS) for all GOCCs regardless of whether they are SSL-covered or exempt.

6. Establish an Integrated Corporate Reporting System (ICRS) to facilitate the effective and efficient monitoring of GOCCs. The ICRS will meet the following objectives: a) to streamline the various corporate reports submitted by GOCCs to the GCG and Service-Wide Agencies to prevent redundancy and ensure consistency in the content of these reports and ; b) to harmonize the frequency and timing of submission of corporate reports in order to reduce the burden on GOCCs. The vision is for the GCG to serve as the central repository of all GOCC data.

7. Conceptualize and help design the corporate governance seminar mandated under the GCG’s Fit and Proper Rule and intended to lay the foundation for members of the Governing Boards in the performance of their functions under RA 10149. It is also meant to help appointive directors from the private sector transition to public service.

8. Clarify, update and refine the State Policy on the use of the corporate form as a vehicle for addressing social and economic problems as well as natural monopolies and developing the system for measuring the social and economic returns of GOCCs as an additional measure of their performance beyond financial statements.

THE GOVERNMENT PROVIDES FINANCIAL SUPPORT TO GOCCs IN THREE WAYS

1. Subsidy – the amounts granted to GOCCs from the national government’s General Fund, to cover either operational expenses that are not supported by corporate revenues or corporates deficits and losses.

2. Equity – pertains to the amount received by GOCCs as payment of capital subscriptions and generally capital investment of the National Government in said corporations which form part of their capitalization.

3. Net Lending – refers to the advances made by the National Government for the servicing of guaranteed and re-lent domestic and foreign borrowings of GOCCs.

EXAMPLES:

NFA – has been a regular recipient of government subsidy for its operations because of the unsustainable nature of its buy high sell low policy, which does not allow full cost recovery from its selling price. Such policy is warranted by its primary function of ensuring the food security of the country and the stability of supply and price of rice.

NHA – regularly receives funding from the government as it performs its mandate of implementing the relocation programs of the government with very minimal sources of revenues.

PHILHEALTH – the government provides financial support for the indigents under the government’s Sponsored Program.

LANDBANK – received government funding because in addition to its mandate of promoting countryside development, it has also been tasked to act as the implementing agency for the Comprehensive Agrarian Reform Program (CARP)

PNR – it is a major recipient of subsidies because of the capital-intensive nature of its mandate that is financially not viable given the challenges and regulations surrounding its ability to charge the appropriate fares.

GOCCs REMITTANCE FOR FY 2013

On June 3, 2013 a total of 38 GOCCs turned over to President Aquino close to P28 Billion in dividends and other forms of remittances to the national coffers.

The practice of declaring and remitting dividends is pursuant to Section 3 of RA 7656 which states all GOCCs are required to declare and remit at least 50 percent of their annual net earnings as cash, stock or property dividends to the national government.

The dividends this year surpassed the collections made last year with eight GOCCs belonging to the elite circle which they called “Billionaire’s Club” for having remitted at least P 1 Billion to the government.

These includes the following:

1. Philippine Reclamation Authority 2. Philippine Ports Authority 3. Manila International Airport Authority 4. Philippine Amusement and Gaming Corporation 5. Power Sector Assets and Liabilities Management Corporation 6. Bases Conversion Development Authority 7. Development Bank of the Philippines 8. Land Bank of the Philippines

Though this marks only the second year of the passage into law of RA 10149 the Philippine Government corporate sector has already taken great strides since its enactment through the GCG. This recognizes the determination of the Aquino administration to pursue the much needed reform of the government corporate sector.

GOCC DIVIDENDS IN MILLIONS

|GOCC NAME |2012 |2013 |
|National Housing Authority |7.3 |47.62 |
|National Home Mortgage Finance Corporation |18 |42.32 |
|Social Housing Finance Corporation |26.88 |74.17 |
|Mactan-Cebu International Airport Authority |48 |41.02 |
|Cebu Port Authority |50 |60 |
|National Development Company |50 |100 |
|Trade and Investment Development Corporation |65 |48.75 |
|National Livelihood Development Corporation |70 |100 |
|Clark Development Corporation |100 |50 |
|Philippine Leisure and Retirement Authority |106.19 |85.27 |
|Metropolitan Waterworks and Sewerage System |150 |343.81 |
|Philippine Economic Zone Authority |276.58 |369.71 |
|Philippine Deposit Insurance Corporation |470 |650 |
|Bases Conversion and Development Authority |540 |2,309.52 |
|Philippine Reclamation Authority |700 |1,000 |
|Philippine Amusement and Gaming Corporation |1,000 |7,182.04 |
|Manila International Airport Authority |1,142.28 |1,547.58 |
|Philippine Ports Authority |1,200 |1,034.99 |
|Philippine National Oil Company |3,500 |500 |
|Development Bank of the Philippines |4,012.2 |3,166.67 |
|Land Bank of the Philippines |5,000 |6,241.47 |
| | | |
|TOTAL |18,505.81 |24,994.94 |
| | | |

ISSUES AND PROBLEMS

1. HOW DO GOCCs’ PERFORMANCE IMPACT ON GOVERNMENT FINANCES?

GOCCs are important sources of income for the national government. Under Section 3 of RA 7656, all GOCCs are required to declare and remit at least 50 percent of their annual net earnings as cash, stock or property dividends to the national government. Exempted from this rule are GOCCs which administer real or personal properties or funds held in trust for the use and benefit of each members. This includes the Government Service Insurance System, Home Development Mutual Fund, Employees Compensation Commission, Overseas Workers Welfare Administration and the Philippine Medical Care Commission.

Aside from dividends, GOCCs remit to the national treasury collections from guarantee fees, foreign exchange risk cover and interest on NG advances to GOCC loans.

While GOCCs contribute to expand government income, their operation also constitutes expenditures for the government. Since these firms are created to protect public welfare, they are deemed to be entitled to government financial support in the form of subsidies, equity infusion, and lending. In 2009 the government extended financial aid to GOCCs amounting to Php 23.8 billion or a total of 1.7 percent of the national government budget.

2.WHAT ARE THE ARGUMENTS THAT UNDERLIE THE PROBLEMS PERTAINING TO GOCCs?

According to the World Bank, state owned enterprises or public corporations generally tend to perform poorly relative to their private counterparts because of the following factors:

1.There is lack of clarity in the government’s role as owner. “Government” can mean the ministries, or parliament, or the general public. That is, no one has a clear Stake in generating positive returns because there is no single identifiable owner and thus, GOCCs are made to feel like they are answerable to no one.

2.Many state-owned enterprises have multiple or conflicting objectives. Government creates a corporation to address social objectives such as lowering the price of a socially-sensitive good, yet the corporation is expected to maximize returns.

3.Access to subsidies, transfers and guaranteed loans create a moral hazard problem such that there is no incentive to be efficient since there is no threat of bankruptcy.

These factors are true for public corporations in the Philippines. There is no single entity that exercises the ownership functions of the state on GOCCs. The right and functions of the state as owner are largely exercised through the department to which they are attached to. The monitoring of overall performance of GOCCs is also dispersed among the various departments in which they are attached.

The poor financial condition of the GOCCs mostly arises from operational factors and inconsistent policy objectives of government. GOCCs are often mandated to provide services with social objectives, which result in losses and necessitates considerable subsidies from the government or results in heavy reliance on debt. The NFA for example is mandated to stabilize domestic price of basic food commodities, particularly rice, and at the same time ensure food security. The conflict arises when the NFA tries to protect the profit margins of rice farmers while trying to protect consumer interests. The NFA thus loses its profitability and incurs huge losses. However, to support its social role, the government continues to provide it with subsidies. In addition, the NFA is allowed to borrow commercially to finance its operations with national government guarantees. Moreover, the NFA is exempt from the payment from all form of taxes, duties and fees, imposts as well as import restrictions.

Another issue is the moral hazard problem in the operations of GOCCs and their conduits/end-users. Because the national government wants to provide service to a larger populace, it tends to be less stringent on loan repayments for service-oriented cooperatives and does not impose stiff penalties on delinquent and erring end-users. As a result, service providers and end-users often have no incentive to shape up and improve efficiency of many GOCCs. In addition, they have less incentive to perform efficiently because the government guarantees their debt.

Aside from causing moral hazard problem, the absolute and unconditional guarantees provided by the national government to GOCCs represents a huge fiscal risk as they effectively expose the national government to contingent liabilities.

A weak oversight system and/or the absence of a regulatory framework applicable for all GOCCs make the task of supervising and monitoring them difficult. While GOCCs are required to prepare an annual accomplishment report, they do not follow a uniform format due to the absence of a coordinating entity which could impose a standard. In addition, there is no strict monitoring whether GOCCs meet deadline in submitting the report to concerned government offices. The COA also suffers from backlog in auditing GOCCs. This leads to poorer accountability on past performances of GOCC officials and weaker oversight of the executive and legislative branches of government.

3.WHAT HAS BEEN DONE TO HELP IMPROVE CORPORATE GOVERNANCE AMONG GOCCs?

In 1984, the Government Corporate Monitoring Committee was created through EO 936 and was tasked to develop the appropriate guidelines on the monitoring of the operations of GOCCs including their utilization of General Appropriations funds from the national government and the contracting and utilization of borrowed domestic and external funds.

In 1986, Proclamation No. 50 was signed by former Pres. Cory Aquino which launched a program for the disposition and privatization of government corporations and/or assets and created the Committee on Privatization and Asset Privatization trust.

In 1992, EO 37 was signed by former President Ramos which restated the privatization policy of the government and enumerated in its annexes public corporations which have been approved for divestment and retention.

In 2003, Pres. Arroyo signed AO 103 with a salient feature of suspending expenditure subsidies to GOCCs except those approved by the Fiscal Incentives Review Board.