Rationalizing the Philippine infrastructure fund allocation of the road transport sector

Professorial Chair Lecture

Metro Manila Commission Professorial Chair Lecture

Place

Department of Agricultural Economics, College of Economics and Management, University of the Philippines Los Baños, College, Laguna

Date

3-21-2002

Abstract

This study empirically addresses the issues relating to the use of the block allocation formula (BAF) in allocating road infrastructure funds in the Philippines. It finds the current BAF deficient for budgetary purposes as it does not take into account productivity and development potential of targeted areas.

The study focused on the impact of the BAF on the Mindanao road sector. Other alternative schemes that considers equity and allocative efficiency are presented. Secondary data were used to describe the road situation and measure the effect of the various alternatives.

The current BAF formula includes equal share index, population index and scarcity of funds as parameters with arbitrary weights of 25%, 20% and 55%, respectively. With the population block, the formula remains biased against populous areas while the equal share index discriminate against productive and large agricultural areas. The population bias of the BAF against Mindanao was estimated at 2,346 pesos per square km. The arbitrary system in setting the parameter weight has considerably diminished the allocative efficiency of the BAF.

Four alternatives to the BAF were considered. One includes the development potential of the region as a parameter in the block formula with a weight of 25 percent. Second, the population share index was neutralized by the total land area of the region. Third, both the equal share and population share indices were removed from the formula leaving scarcity of infrastructure and development potential index as parameters with equal weights of 50 percent. Lastly, a linear regression analysis was used in determining regional fund allocation with gross regional domestic product, scarcity of infra, national road length, population and land area as parameters. This approach eliminated the arbitrary setting of weights on the parameters.

Among the four alternatives, the linear regression approach showed superiority in terms of equity and allocation efficiency criteria. But due to inadequate historical data, the benefits of this approach over the BAF were not highly conclusive. Results of the first three alternatives, however, indicate that the inclusion of development potential index in the formula increase the funds allocation by as much as 5 percent.

Because of the definitive effects of the development potential index, a redesigning of the current BAF is called for. Allocation schemes that consider development potential and meets equity and allocative efficiency criteria should be given preference. The suitability and efficiency of a particular approach will depend largely on the reliability of available data.

Location

UPLB Main Library Special Collections Section (USCS)

College

College of Economics and Management (CEM)

Language

English

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