Wednesday, July 27, 2011

Department of Budget and Management proposes to Congress that the U.P. System will have a zero capital outlay for the 2nd straight year in 2012


By Chanda Shahani

This comment has been published today in the Facebook page of the University of the Philipines System:
"Citing statistics on page 5 of this PDF file, the University of the Philippines (UP) has a budget allocation of P5.5 billion (i.e., P4.8 billion for personal services, P0.7 billion for maintenance and other operating expenses and zero budget for capital outlays)."
The Department of Budget and Management's budget allocation for U.P. in 2012 can be accessed here
It is perhaps out of a sense of courtesy (i.e., from one sector of government to another) that the U.P. System website's neutral tone belies the terrific body blow dealt to the U.P. System by the Department of Budget and Management. For no organization, ranging from a very large state university down to a neighborhood day care center can exist without an allocation for capital outlays.
The Facebook page of the University Student Council of U.P. Diliman also said today that: "The UP budget proposed for next year is 17B but the DBM only approved 5.54B. That's a 3.6% decrease from the GAA, 20.6% decrease for the Maintenance and other Operating Expenditures (MOOE) and ZERO Capital outlay yet again."
An earlier analysis made several weeks ago by the Diliman Diary shows how much the U.P. System has already had to endure (percentage-wise), in terms of budget cuts since 2006.
Analysis of 2006-2011 U.P. Budget with implications for the 2012 budget.

The DBM argued in 2010 that there were so many projects (new buildings such as the National Science Complex, etc.) in the pipeline that U.P. did not need any more capital outlay for 2011. 

This reasoning is erroneous, because the definition of the financial term “capital outlay” transcends just building new buildings. In a complex organization such as the U.P. System, capital outlays are always needed not only from year-to-year to acquire assets or improve the useful life of existing assets, but to fund long-term projects that are expensed as they are completed stage-by-stage. 

Using 2006 and 2007 as representative years in order to ferret out the ratio of capital outlay (CO) to overall budget, we can see that the average CO is 11%. We did not anymore include 2008, 2009 and 2010 because those were extraordinary years in terms of obtaining funds from the National Government which were heavily influenced by the U.P. Centennial years and these would tend to artificially inflate the ratio of CO to the overall budget.

The point is that historically (at least based on these partial figures, U.P.'s budget for CO should be at around 11% of the overall budget). Of course, having a longer time series (say 20 years) would be preferable, as we could then get more representative data, but 11% capital outlay a year does not seem unreasonable for any institution whose assets are continually, depreciating, falling apart and in need of replacement or upgrading.

Some legitimate capital outlay expenditures for a university and research institution would include building new buildings, acquiring major new equipment (e.g.: research equipment) or even acquiring land or even putting up a new extension of an existing college (eg: U.P. College of Business Administration and U.P. College of Law in Fort Bonifacio, Taguig City). 

It is imperative for the Aquino Administration and Congress to recognize Capital Outlay as a necessary and legitimate expense for any public or private entity, and to restore an amount for the 2012 budget.

We have put in Annex A aggregate figures from 2006 to 2011. Using a Time Series or Horizontal Analysis of U.P.'s budget from the national government in order to get an appreciation of the respective increase or decrease (in percentage terms in year-to-year growth), we can see that U.P.'s budget shrank by 7% in 2007 compared to 2006, but from 2008 to 2009, it grew by 25%, which are due to lobbying efforts by the U.P. Administration to DBM and Congress to increase its budget because of positive publicity for U.P. generated by the U.P. centennial (please see Annex A). However, U.P.'s budget decreased from 2010 to 2011 by 18%, due to a non-insertion of even a single peso for capital outlay by the Department of Budget and Management for 2011. 

The removed figure for capital outlay (equivalent to 18% of U.P.'s budget in 2010) in 2011 is PhP 1.28 billion

Some thoughts on Core Inflation and its impact on the U.P. Budget.

The next question is, if CO should not be 0% (as it was in 2011), but 11% in 2012, as per historical precedents, then CO should be 11% of what? We cannot resort to zero-based budgeting computations, as we do not have the institutional advantage that DBM and the U.P. Budget Office has (i.e., access to all the data on the budget down to the last office expenditure) as they can throw out all previous assumptions and start from scratch (minus the politics of budgeting, this is strictly speaking, a valid approach). 

What we can do, however, is to treat 2006 as a base year and see the impact of core inflation on the U.P. budget.

The National Statistical Coordination Board (NCSB) argues that core inflation (which is a lower figure) rather than headline inflation (which is a higher figure because it includes more price volatile commodities in its index) is the more meaningful figure to use in gauging the impact on inflationary effects on policy making. We are adopting this point of view in terms of making adjustments to a yearly budget such as U.P.'s (, and this has the benefit of also being the more conservative figure than headline inflation, as we prefer to err on the side of conservatism when it comes to financial computations.

Using 2006 as a base year of comparison and utilizing data from NCSB for core inflation (please see Annex B which is sourced from:, we can see that average core inflation was 4.46 a year, which means that using 2006 as a base year, one budget peso in 2006 is now worth 22.3% less in 2010 , 27% less in 2011 and 31% less in 2012. 

Assuming for the sake of discussion that there were no new programs implemented, additional personnel hired, or new buildings built in U.P. post-2006, U.P.'s budget should have at the very minimum, increased by 31% of its total PhP 5,456,428,000 in 2006 to a larger amount in 2011 just to keep abreast with core inflation. 

Thus U.P.'s budget should be at the very minimum have been PhP 6,929,663,000 in 2011 (to counter the 27% deterioration in the value of the peso from 2006 as the base year) in and 7,147,921,000 in 2012 (to counter the 31% deterioration in the value of the peso from 2006 as the base year) in real terms compared to its budget of PhP 5,949,619,000 in 2011 which is really too low. 

Thus for the Aquino Administration to say that there was no budget cut because there was simply no provision for CO in 2011 (as the claim was that all the new buildings in the pipeline negated the necessity for having any sort of capital expenditure in 2011), is false and misleading because it ignores the effects of core inflation. 

Additionally, MOOE was even cut from PhP 1,358,322,000 (2010) to PhP 653,999,000 (2011) or by 52%. Also, U.P.'s capital outlay for 2012 should be an estimated 11% of the minimum PhP 7,147,921,000 in 2012 or PhP 786 million,which is even fairly near the capital outlay of PhP 727,560,000 in 2006, so there is already a historical precedent for this.

A minimum budget increase to PhP 7,147,921,000 to keep abreast of inflation does not even take into account increases in Personal Services and MOOE which will come about in 2012 as a result of the new building activities, as these buildings need to be operated, maintained and run properly. However, we will not comment further on this, because we do not have the data to project in any analysis.

Should the U.P. System Cut the Umbilical Cord of 100% Government Subsidy?

Of course, the other side of the problem is that the National Government can always say that U.P. has to work within the budget it was given, and all they can afford is so much, and that since U.P. is a land grant university, then it has to raise the difference from its assets. The problem with this approach, while partially valid, is that it ignores the following:
a)      U.P. has several indispensable schools of learning which are continuously and directly tapped by the national government and the people for national development. To be hard-nosed about it, the tax payers and the government have to pay for what they get. There are no free lunches anywhere. RA 9500 states that U.P. is the only national university bar none, and so the funding also has to be there or the national government itself is in violation of the law. U.P. is not a comparable State University and College anymore, which are now the subject of massive cost-cutting measures by CHED.
b)      Tuition fees only accounted for 5% of U.P.’s total revenue in 2011 and this reality, combined with student and U.P. administration opposition to a tuition fee increase only shows that U.P. will have to look elsewhere (aside from national government allocations) to fill in a possible funding gap.
c)      Assuming for the sake of discussion, that the national government will not be able to completely comply with the law by funding U.P. as the national university, there are several steps that may be taken as part of an overall strategy. For example, U.P. can do more to raise internal funds, and in fact a common size income statement (for internally generated income) from 2006 (Please see Annex C) shows in percentage terms how the gaps may be filled in by internally generated income. Taking into consideration the fact that national government expenditures, as a percentage of U.P.’s total revenue has already begun to decline from 81% in 2006 to 73% in 2011, then other growth areas (in terms of funds generation) would be in U.P.’s income from revolving fund. The increase in income here should be aggressively augmented by money market placements in conservative investments (e.g.: Treasury bills and bonds). It should also be the subject of aggressive audit by the Commission on Audit, which has a long history of complaints about how U.P. handles its cash once it is on hand. There should be complete vouchers, and complete documentation for every deposit and withdrawal into these funds.
d)     Another red flag is grants and donations which according to Annex C, has jumped from almost 0% in earlier years to 7% in 2011, but this could easily be doubled to 14% by an aggressive fund raising campaign by the Pascual administration which may actually already be happening, considering that the year is not over yet. However, grants and donations - an issue which was relevant under the Roman administration - still remains relevant under the Pascual administration (see the part about U.P. in: because we do not know what is happening to the the funds of these foundations which are not subject to COA monitoring. This cookie jar must be closely monitored, now that the U.P. budget is in dire straits and every peso that is earned must go to its rightful place. Additionally, faculty affiliated foundations (for the list of these foundations submitted by U.P. in 2010 to COA, please see must also subject themselves to COA scrutiny under the principle that the chief beneficiaries (the faculty) must get what is due to them, but there should be transparency and accountability and in this, COA’s role is superior to that of any external auditor, no matter how good they are (even SGV). This is because external auditors tend to be biased in favor of their clients who pay them for an external audit, in compliance with SEC rules, while COA tends to play a more neutral role since they are not beneficiaries of these foundations (non-COA external auditors, who are paid by their clients would logically be reluctant to issue reports that would put their clients in a bad light). Even if there are restrictions on monies earned by U.P. from donations and foundations, these should still be subject to scrutiny to ensure that fellowships or stipends (eg for faculty research, travel grants, research projects or travel abroad) are properly disbursed and released in an equitable manner.
e)      Since U.P. is a land grant university, it is likely that more of its properties and even other non-current assets (eg: patents and other intellectual properties) will be maximized. However, RA 9500 requires projects exceeding PhP 50 million to be subject to public consultation, so it would be a good idea for the sectors be ready with a standing committee that can scrutinize such revenue generating projects to ensure that they are beneficial to the university, utilizing proper financial criteria, as well as other criteria (eg: is the project consistent with the mission of the university and its values).
f)       On a final note, it would not be a bad idea for U.P. to consider issuing long term University of the Philippines bonds for some  of its long-term capital expenditures and other expenditures (payable in say, 25 years). U.P.’s excellent reputation would allow this to be favorably received in the capital markets, but the reception would be better if there were no outstanding issues of a financial nature (eg: adverse COA reports) that would scare off the underwriters. An excellent ready market for this would be U.P. alumni here and abroad (thus, the bonds can be peso denominated and dollar denominated bonds).

DBM defines what is allowable capital outlay in a 2010 memo to SUCs and then slashes it to zero in 2011 and 2012

The fact that the administration of U.P. President Alfredo Pascual asked DBM for P17 billion in funds for 2012 (which would reflect the U.P.'s much better appreciation of actual costs compared to ours) but only got a proposed allocation of 32% of that or P5.5 billion shows how seriously flawed and skewed is the reasoning of DBM; especially if we take into account that there needs to be a capital outlay to replace aging machines, depreciating equipment and for other expenses.

President Aquino's State of the Nation Address (SONA) and  its annex to the SONA address, which is the detailed technical report attached to the SONA is revealing in terms of what the Aquino government considers important enough to merit funding (DSWD and conditional cash transfers) and what is of lesser importance (SUCs such as U.P. are hardly mentioned at all). But the annex does state that "As early as 30 December 2010, the DBM had already issued National Budget Memorandum (NBM) No. 107, s. 2010 providing all heads of departments, agencies, bureaus, offices, commissions, state universities and colleges, and other instrumentalities of the national government the overall policy framework and thrusts for the FY 2012 Budget. The NBM also set specific guidelines for the budget preparations."

NBM No. 107, s. 2010 in fact was signed by no less than DBM Secretary Florencio B. Abad and details and defines in Part III DBM's definition of capital outlays which include investments, repair and rehabilitation of occupied buildings, land improvements, the acquisition of office equipment, furniture and fixtures, transportation equipment, public infrastructure, reforestation of lands, loan outlays, livestock and work animal acquistions.

Based on the above DBM definition, which includes many necessary materials and equipments with which to run a complex organization such as the U.P. System coupled with DBM's non-insertion of capital outlay as an item in the proposed 2012 budget, it seems likely that U.P. will have a difficult time operating at full capacity unless this anomaly is corrected by Congress itself.

(Chanda Shahani is the editor of the Diliman Diary. An A.B. Comparative Literature graduate from U.P. Diliman, he also has a Master's degree in Entrepreneurship from the Asian Institute of Management and is a former business page reporter for the Philippine STAR).

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