The civil service in the Philippines faces high costs that constrain fiscal flexibility, as civil service expenditures account for about 35% of national government expenditures. An opaque and inadequate compensation system and lack of meritocracy have undermined civil service management, professionalism, and morale. While civil service reform faces substantial political challenges, an initial reform program could focus on controlling and reducing wage bill costs through a compensation modernization program and modernizing the legal framework to strengthen professionalism and integrity.

1. Discussion Draft
Civil Service Reform
High civil service costs, amounting to about 35% of national government expenditures, have
constrained fiscal flexibility. Civil service management, professionalism, and morale have been
sapped by an inadequate and opaque compensation structure and the lack of a meritocracy.
While the political economy challenges associated with civil service reform are substantial, a
reform program could begin with actions to control and reduce the fiscal weight of the wage bill
by designing an affordable compensation modernization and rightsizing program, and moderniz-
ing the legal framework for the civil service to strengthen its professionalism and integrity.
Background
Third, past reform efforts have not been very
Three major issues have long confronted successful. There have been several attempts
Philippine policy makers in their quest for an since 1985 to pass legislation on restructur-
affordable, professional, and skilled civil ing the executive and re-engineering the
service that can effectively provide policy bureaucracy—all of them unsuccessful.
advice, implement policy decisions, and Policy makers are now reluctant to confront
deliver public services. this long-term, politically challenging, and
complex reform agenda.
First, high civil service costs have con-
strained fiscal flexibility. Since 1997, falling Nevertheless, fiscal constraints and a new
revenues and rising debt-servicing demands Government provide an opportunity to
have squeezed the amount of public re- initiate a civil service reform process that is
sources available for poverty-reducing politically feasible, administratively doable,
developmental programs. In addition, very and fiscally sustainable.
high levels of personal services (PS) expen-
ditures have exacerbated this compression of Issues
discretionary expenditures, especially
poverty-reducing investment and mainte- Controlling civil service costs
nance and other operating expenditures
(MOOE) in key sectors such as education, The cost of the civil service is a significant
health, social protection and infrastructure. part of the heavy fiscal burden. Civil service
Unless the revenue-to-GDP ratio recovers to PS expenditures are about 35 percent of
1997 levels, PS expenditures will need to be national government expenditures annually.
rapidly and effectively controlled for fiscal The PS share has been even higher in some
sustainability. key sectors, for example, rising to 90 percent
in 2001 in the Department of Education
Second, civil service management, profes- budget. The same trend is also evident at the
sionalism, and morale have been sapped by local government level. In addition, the last
an inadequate legal and institutional frame- few years have seen substantial salary
work for managing civil service policy and increases for different categories of civil
excessive politicization (the latter exempli- servants (e.g., armed forces, police, teachers).
fied by the substantial role of the presidency In 2003 and 2004, the Government had to
in making appointments to “positions of defer payments to suppliers to keep within its
confidence”, i.e., political or “elective” deficit targets for the first half-year. And, as
appointments).1 in 2003, this may lead to an expansion of
monthly budget deficits in the second half of
the year.
1
This is through appointment of non-Career
Executive Service (CES) personnel to CES
positions.
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2. Overall, the broad government strategy to inappropriate skills mix (too many lower-
control the wage bill through incremental level staff generally, and not enough techni-
measures is not working. The strategy has cal staff in specific sectors) constrains the
been to minimize contractual positions, Government’s ability to carry out critical
contain the growth of permanent positions, development tasks effectively.
and control local government unit and
government owned and controlled corpora- Long-standing technical constraints are a
tion (GOCC) expenditures on personal key factor in the failure to control personnel
services. costs. These include: (i) lack of information
systems on the basis of which the CSC and
Weak establishment controls contribute to DBM can exercise effective control over the
the Government’s inability to control its approved positions (plantilla) and the
wage bill. The Government has instituted payroll; (ii) establishment controls in national
measures to control recruitment and impose government agencies, with agencies largely
selective hiring freezes. But these have not free to make staffing arrangements most
been as effective as anticipated because: suitable for their purposes; and (iii) only a
(i) reliable information on the number of token relationship between the plantilla and
filled and unfilled permanent positions, and the payroll, facilitating a widespread practice
on the number of temporary employees, does of employing staff on a casual or temporary
not exist; (ii) the Department of Budget and basis without reference to authorized (plan-
Management (DBM), the Civil Service tilla-based) positions.
Commission (CSC), and the Government
Service Insurance System currently maintain Progress in controlling the wage bill through
their own personnel information databases, incremental measures is slow, and the fiscal
but these are not integrated with each other impact minimal. The effort to control the
and are not up to date; and (iii) each depart- wage bill has been led by the Presidential
ment maintains its own personnel registry— Commission on Effective Governance
since these are not cross-checked, the (PCEG), DBM, and CSC. In 2001, the PCEG
possibility of the same person being ap- began an effort to streamline the executive.
pointed to multiple positions in different Scores of contractual positions in the Office
agencies is very real. of the President were abolished in early
2002. But this effort did not continue,
Employment levels are bloated. Almost robbing it of impact. The President also
1.07 million permanent employees are paid issued orders directing GOCCs and govern-
from the national budget. Adding about ment financial institutions (GFIs) exempted
350,000 local government employees and from the Salary Standardization Law to
about 90,000 GOCC employees, total public standardize their pay practices and make
employment comes to 1.5 million. This senior officers’ compensation comparable
constitutes almost 2 percent of the popula- with counterpart positions in national
tion—higher than, for example, 0.1 percent agencies. The fiscal impact of these measures
in China and 0.3 percent in Vietnam. At the has been minimal, and further negated by
national level, the five largest employers of salary increases granted to almost all catego-
permanent staff are the Department of ries of employees during 2002–2004.
Education, state universities and colleges, the
Department of Health, the court system, and Proliferation of agencies, functional duplica-
the Department of Environment and Natural tion, and overlaps among agencies and
Resources. Ironically, however, amid the within and between departments compound
general overstaffing, staff shortages are the problem of high personnel costs. Some
emerging in key professional categories agencies seem to be overstaffed, while some
(such as auditors, lawyers, and information are also overlayered, with too much middle
technology professionals). In addition, an management. There are staff surpluses in
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3. many functions and staffing shortages in significant milestones. At the same time,
others. Equitable distribution of staff across civil servants in benchmark positions in
regions and provinces is an issue. Overlap lower grades tend to be somewhat overpaid
and duplication of functions also adds to compared to private sector equivalents.
numbers.
The compensation structure is opaque,
Configuring civil service policy and man- complicated, and outmoded. There is a
agement to achieve greater public sector growing abundance of increasingly perverse
efficiency comprises the next set of chal- and nontransparent “allowances”, especially
lenges confronting the new Government. in GOCCs and GFIs. Pressure to contain the
Two issues are key: (i) compensation and defined benefit pension bill has resulted in
incentives, and (ii) merit-based recruitment growth of unconsolidated “allowances”
and appointments. rather than increased basic salary. In addi-
tion, productivity and performance pay has
Strengthening civil service incentives, degenerated into merely another allowance,
meritocracy, and management paid at a flat rate to almost all employees. Its
original intention has been lost. On the other
Compensation levels are inadequate for hand, geographic differences in pay and
attracting, retaining, and motivating civil allowances have been abolished. But this has
servants in critical jobs. The single civil led to an unintended consequence: national
service salary schedule, with 33 grades each government staff in regional offices are now
with eight steps, is coming under increasing better off in real terms than their Metro
pressure. Many GOCCs and GFIs have Manila counterparts, and experienced staff
already broken away, fuelling pressures. are now reluctant to move to the national
Fiscal pressures have led to numerous capital area from regional offices. The result
entities being granted exemptions from salary is an inefficient system, cumbersome to
standardization on the basis of their revenue- administer and vulnerable to abuse.
generating capacity. These exemptions have
created a special class of civil servants whose Lack of meritocracy in the civil service,
compensation has increased disproportion- especially at higher levels, has lowered civil
ately to those covered by the Salary Stan- service morale and capability. Political
dardization Law. This debasement of the influence and the spoils system still hold
salary standardization principle enunciated in sway in appointments to senior and other
the Constitution has demoralized civil career positions. Open selection for career
servants, and constitutes part of the reason executive positions continues to be eroded by
why national government agencies com- political influence. This is exacerbated by the
pletely dependent on the budget are finding it fact that the President appoints no less than
difficult to attract, recruit, or retain personnel 11,000 personnel comprising 3,000 constitu-
for technical and managerial positions. Pay tional positions, 6,000 CES positions, 1,650
surveys suggest that salaries for senior civil prosecutors, and 500 other positions created
servants may be as little as 20 percent of by special laws.2 As a result, the Philippines
private sector equivalents, and salaries for has the greatest depth of political appoint-
senior executives and for professionals in the ments, going all the way down from secre-
middle pay groups lag well behind equivalent tary, undersecretary and assistant secretary to
private sector salaries. bureau directors, regional directors and
Low wages potentially also pose governance 2
risks to the extent that they may be associ- Judicial interpretations have also perpetuated the
discretionary nature of the power of appointment
ated with absenteeism and corrupt practices. by defining appointment as a “political question
Civil service salaries are also compressed— involving considerations of wisdom which only
they hardly allow room for reward and the appointing authority can decide.”
3

4. service directors. In contrast, most East Addressing political economy challenges
Asian countries make such appointments
only to the top two tiers. At present there are The political economy challenges associated
numerous positions of confidence, while the with CSR are substantial. The political
practice of offering ‘courtesy resignations’ executive exerts wide-ranging influence on
with changes of administration creates the civil service structure and actions through an
potential for high turnover of senior officials. entrenched system of spoils and patronage.
The source of this influence is two-fold.
Effective management of the civil service and First, there is the threat of instability of
costs have been hindered by overlapping assignment. Changes in national administra-
CSC and DBM mandates. The CSC and tion are invariably accompanied by sweeping
DBM currently deals with civil service changes in civil service staffing. An impor-
employment and compensation issues. The tant part of this phenomenon is traceable to
CSC is the independent constitutional body the vast powers of the Presidency, excep-
vested with the authority to formulate and tional in relation to other countries. Civil
oversee implementation of all aspects of civil service rules, which preserve only rank but
service policy, including compensation not specific assignments, pose no obstacles to
policy and personnel management. The CSC the arbitrary replacement of incumbents.
is slowly building up its capacity to effec- Second, the weak and subordinate position of
tively perform its constitutionally mandated the civil service is reinforced by large
role of formulating and overseeing imple- differentials between private-sector and
mentation of all aspects of civil service public-sector pay and the gap in social status
policy, including compensation and person- between holders of political positions
nel issues. At the same time, the DBM also (whether elected or appointed) and their
deals with budgetary pay and employment rank-and-file civil service subordinates. In
issues. Such overlapping responsibilities and such circumstances, it is a rational response
turf battles at the working levels have, in the on the part of civil servants to play a submis-
past, diminished the effectiveness of both sive role and abdicate their technical role to
agencies, despite the intention of the leader- accommodate “political decisions”.
ship of each agency to contain civil service
employment and costs. The Bureau of Internal Revenue (BIR)
exemplifies the governance challenges and
An outmoded and ineffective legal and complexities of CSR in the Philippines. While
integrity framework is a major constraint in the BIR is technically a bureau under the
moving toward a modern and professional Department of Finance, the Secretary of
civil service. The CSC has prepared an Finance has traditionally had little influence
updated draft of the new Civil Service Code, over the selection of the BIR head and little
which is currently under legislative review. supervision over BIR functioning. The
The Code seeks to promote efficiency and appointment of the BIR Commissioner has
professionalism through merit-based recruit- traditionally been regarded as among the
ment, performance evaluation, and promo- significant presidential political appoint-
tion; make compensation more competitive ments. The Commissioner, though not of
and performance-linked within fiscal con- cabinet rank, serves at the President’s
straints; protect upright civil servants in the pleasure. Hence the leadership of the BIR
discharge of their functions; and give changes with every change in administration.
stronger accountability and integrity mecha- The BIR head in practice traditionally reports
nisms. In addition, the PCEG has formulated directly and justifies his or her performance
an integrated anti-corruption strategy for the to the President. This has removed the BIR
Government aiming, among other things, to from the usual discipline of regular line
strengthen integrity in the civil service. agencies of its own level and those immedi-
ately above it, and designated it as an area of
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5. large potential rents. As a result, the BIR is term nature of these reforms, draws on
an agency in which—with honorable excep- support from the political leadership and the
tions—corruption has become entrenched. public, and involves stakeholder consulta-
Changes in regime and of political principals tion.
may have little impact on the actual practice
of and extraction rates from corruption on the Suggestions for priority actions
bureaucracy’s part. What occurs is merely a
reassignment of established rents from old to The new Government plans to aggressively
new principals. Lastly, the BIR has also promote growth and combat poverty. The
refused to be audited by the otherwise key fiscal management challenge here is to
powerful Commission on Audit. sustain the level and improve the efficiency
of poverty-reducing public expenditures. To
The source of the rents extracted by corrupt do this, it would be desirable to first contain
BIR officials is found in the discretion the fiscal weight of the civil service wage
exercised by BIR staff over taxpayers. This bill. A reallocation from PS to MOOE could
power takes the form either of exempting improve the effectiveness and efficiency of
taxpayers from their legal liabilities, or in the government spending, especially in sectors
selective application of the latter, in a country such as education.
where tax compliance is low to begin with.
There are notoriously large slippages in the The short-term priority is to control and
payment of corporate and personal income then reduce the fiscal weight of the wage
taxes and of value-added taxes. This, plus the bill. Incremental measures are no longer
inherent complexity and opaqueness of tax enough. A two-pronged action plan to control
laws (specifically those relating to allowable the wage bill could comprise:
deductions) and spotty record-keeping,
makes it inevitable that selective tax audits • Tapping specific sources of “flexibility”
will provide opportunities for harassment, in PS allocations in the short run. Flexi-
followed by “tax compromises”. ble items within the overall PS allocation
comprise wages of nonpermanent person-
Other anomalies include diversion of bona nel, per diems, fringe benefits, and certain
fide tax payments to privately owned bank other items. Roughly 18–20 percent of the
accounts; nonremittance and diversion of tax PS allocations across the national budget
rebates for small-wage earners; and a brisk are “flexible”. This exercise could be
business in falsified tax credits. (The rents undertaken for the 2005 budget and im-
are so lucrative that some BIR officials have mediate savings identified.
falsified their birth dates to postpone their
retirement.) In addition, informal social • Deciding on fiscally affordable compen-
customs (e.g. generous cash gifts to staff sation modernization and rightsizing op-
during holidays and lavish staff parties and tions, and presenting needed legislation
outings) also reinforce the “insider” culture. and a costed action plan in 2004. Work
on a review of the compensation and
A sustainable medium-term civil service severance policy is already under way.
reform strategy will have to take political Developing an appropriate severance
economy challenges into account. Fiscal package entails amending existing legisla-
pressures can provide an entry point for tion. This will have to be preceded by an
short-term civil service reform actions. exercise to realistically calculate the fiscal
Alone, they cannot sustain the institutional impact of such a measure, how it can be
reforms that aim to strengthen civil service financed, and over what period of time
management, professionalism, and integrity. such an exercise could be implemented.
These require a strategy that takes into The CSC and the DBM are equipped with
account the political complexity and long- modeling tools to undertake the technical
5

6. exercises. Armed with the data, consulta- Order 292, which deals with how the
tions with stakeholders, such as legislators Government operates administratively
and employee associations, must then take and financially) is now overdue. It would
place. It will be important to define a be desirable to appoint a task force in the
timeline for this initiative, specify respon- early days of the new administration to
sibilities, prepare a costed action plan, and implement this urgent and important task.
submit the legislation to congress in 2004
so that it can be implemented from 2005. Reforming the BIR will be a litmus test of
Preliminary analysis indicates that a re- the administration’s ability to grapple
duction of about 10 percent of central with thorny governance and civil service
government employment, over and above reform issues and entrenched vested
normal attrition, could be achieved by interests. The new administration’s first
end-2006.3 months in office would be the most oppor-
tune time to tackle this long-pending issue.
Modernizing the legal framework for the Proposals to transform the BIR have been
civil service could be a launching pad for under legislative scrutiny for a while.
strengthening civil service professionalism Regardless of whether such legislation is
and integrity. This has two main aspects: passed, it will be important to intensify
recent efforts (spearheaded by the PCEG,
• Passage of the Civil Service Code on a CSC, DOF and BIR management) which
priority basis. A modernized legal frame- focus on administrative measures to
work is indispensable for professionaliz- strengthen the professionalism of BIR staff.
ing the civil service. Executive These involve actions to reduce corruption,
commitment to modernizing the civil improve discipline, recognize and reward
service legal and integrity framework is integrity, promote efficiency and inculcate a
undoubted. Given the troubled history of customer service ethos. How well these
such legislation, proactive and sustained incentives and disincentives are implemented
advocacy in favor of the new Code with could be a bellwether for civil service reform
relevant stakeholders could well deter- in the Philippines.
mine the success or failure of this attempt.
Enactment of the Code should be a prior- Reducing the number of presidential
ity for the new Government—as history appointments from the current 11,000 to
shows, delay is likely to be fatal for civil (say) 5,000 through an executive order
service reform champions. The updated would send a strong signal of the new
Code should (i) separate professional civil administration’s willingness to strengthen
service positions and positions of confi- civil service meritocracy, professionalism,
dence, (ii) separate key policy provisions and morale. This would sharply reduce the
from other details of employment, and number of non-CES appointees to CES
(iii) amend the definition applicable to positions; redressing this injustice to civil
civil servants’ selection and promotion to servants would also open the door for
competitive assessment of merit. promoting capable and upright civil servants.
At the same time, redefining the parameters
• Amendment and modernization of the for appointment of non-CES individuals to
Administrative Code of 1987 (Executive CES positions would also strengthen profes-
sionalism.
3
There will be incremental costs associated with Lessons from the political economy of
such downsizing, for which sources of financing earlier reform attempts can now provide a
will have to be identified. It is important to realize
that rightsizing employment while paying
solid foundation for a more realistic
severance will not lead to short-term budgetary reform strategy and sequencing. Previous
savings. attempts indicate that (i) there must be strong
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7. and publicly stated support for such measures employment growth by creating a com-
from the highest levels of political leader- mon personnel database for national gov-
ship, (ii) it would be most appropriate for a ernment agencies. The exercise will result
high-level entity such as the PCEG to lead in a specification and possible cost esti-
this exercise, (iii) the CSC and DBM should mate by late 2004—it would be desirable
take the technical lead, coordinate with other to provide an allocation in the 2005
agencies, and provide logistical support to budget to initiate installation. The
the PCEG, and (iv) sequencing and prioritiz- database is intended to have a unique link
ing reform actions could make the difference for each employee to a corresponding
between success and failure. Consultations authorized position of each agency. Those
with stakeholders, such as legislators and persons who cannot be assigned to a post
employee associations, must form an integral will be shown as additional to the author-
part of a CSR strategy. Across-the-board re- ized establishment and therefore shown as
engineering and downsizing efforts unac- an additional cost for which appropriate
companied by advocacy and consultation are authorization must be obtained. Similarly,
likely to fail and provoke cynicism, as have all posts that are not occupied will be
such efforts in the past. Successful imple- shown as vacant, indicating a potential
mentation of a targeted exercise, especially in saving in projected budgetary expendi-
respect of the BIR, could instead spur such ture. This initiative will be a first step
initiatives. toward remedying the establishment con-
trol problem.
Over the medium term, two sets of actions
to control personnel costs are desirable.
• Administrative streamlining to accom-
pany employment and compensation ad-
justments. Expediting national
government initiatives to streamline ex-
ecutive structure and functioning would
be appropriate, by e.g., eliminating over-
lapping or unnecessary functions and
entities, and efficiency improvements.
Such an exercise needs to be initially
targeted to, for example, a few of the 13
departments and agencies already identi-
fied for “deactivation”. However, early
completion of ongoing diagnostics is es-
sential for developing a sequenced and
credible medium-term action plan. It is
desirable that the CSC and DBM jointly
take the lead in this area, coordinating
their efforts with other agencies, to pre-
pare a draft action plan which could form
the basis for consultations.
• Expedite the installation of a personnel
information system linked to the payroll.
A grant-financed initiative is being led by
the CSC and DBM to monitor and control
7

8. Figure: Philippines: Structure of Public Employment, 2002
TOTAL PUBLIC EMPLOYMENT
1,531,430
GENERAL GOVERN-
GOCC/GFI
MENT
90,641
1,440,789
Armed Total Civilian
Total LGU
Forces National Govt.
344,576
124,696 971,517
Total education
employment { Education
543,941
Education
N/A
Total health
employment { Health
26,625
Health
N/A
Total police
employment { Police
111,743
Police
N/A
Civilian
LGU
National Govt.
(excluding
(excluding
education, health,
education,
police)
health, police)
344,576
289,208
Permanent Permanent
950,039 249,895
Casual/ Casual/ Casual/
contractual
employees
{ contractual
21,478
contractual
94,681
Source: DBM, World Bank Staff Estimates
8

9. 9