Discussion Draft                                    Civil Service ReformHigh civil service costs, amounting to about 35% o...
Overall, the broad government strategy to             inappropriate skills mix (too many lower-control the wage bill throu...
many functions and staffing shortages in                 significant milestones. At the same time,others. Equitable distri...
service directors. In contrast, most East              Addressing political economy challengesAsian countries make such ap...
large potential rents. As a result, the BIR is          term nature of these reforms, draws onan agency in which—with hono...
exercises. Armed with the data, consulta-                   Order 292, which deals with how the    tions with stakeholders...
and publicly stated support for such measures         employment growth by creating a com-from the highest levels of polit...
Figure: Philippines: Structure of Public Employment, 2002                TOTAL PUBLIC EMPLOYMENT                         1...
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Db06 civil servicereform

  1. 1. Discussion Draft Civil Service ReformHigh civil service costs, amounting to about 35% of national government expenditures, haveconstrained fiscal flexibility. Civil service management, professionalism, and morale have beensapped 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, areform program could begin with actions to control and reduce the fiscal weight of the wage billby 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 veryThree major issues have long confronted successful. There have been several attemptsPhilippine 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 theservice that can effectively provide policy bureaucracy—all of them unsuccessful.advice, implement policy decisions, and Policy makers are now reluctant to confrontdeliver 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 newrevenues and rising debt-servicing demands Government provide an opportunity tohave squeezed the amount of public re- initiate a civil service reform process that issources 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 Issuesdiscretionary expenditures, especiallypoverty-reducing investment and mainte- Controlling civil service costsnance and other operating expenditures(MOOE) in key sectors such as education, The cost of the civil service is a significanthealth, social protection and infrastructure. part of the heavy fiscal burden. Civil serviceUnless the revenue-to-GDP ratio recovers to PS expenditures are about 35 percent of1997 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 somesustainability. key sectors, for example, rising to 90 percent in 2001 in the Department of EducationSecond, civil service management, profes- budget. The same trend is also evident at thesionalism, and morale have been sapped by local government level. In addition, the lastan inadequate legal and institutional frame- few years have seen substantial salarywork for managing civil service policy and increases for different categories of civilexcessive 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 toin making appointments to “positions of defer payments to suppliers to keep within itsconfidence”, i.e., political or “elective” deficit targets for the first half-year. And, asappointments).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-CareerExecutive Service (CES) personnel to CESpositions. 1
  2. 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 thebeen to minimize contractual positions, Government’s ability to carry out criticalcontain the growth of permanent positions, development tasks effectively.and control local government unit andgovernment owned and controlled corpora- Long-standing technical constraints are ation (GOCC) expenditures on personal key factor in the failure to control personnelservices. costs. These include: (i) lack of information systems on the basis of which the CSC andWeak establishment controls contribute to DBM can exercise effective control over thethe Government’s inability to control its approved positions (plantilla) and thewage bill. The Government has instituted payroll; (ii) establishment controls in nationalmeasures to control recruitment and impose government agencies, with agencies largelyselective hiring freezes. But these have not free to make staffing arrangements mostbeen 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 andfilled and unfilled permanent positions, and the payroll, facilitating a widespread practiceon the number of temporary employees, does of employing staff on a casual or temporarynot 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 GovernmentService Insurance System currently maintain Progress in controlling the wage bill throughtheir own personnel information databases, incremental measures is slow, and the fiscalbut these are not integrated with each other impact minimal. The effort to control theand are not up to date; and (iii) each depart- wage bill has been led by the Presidentialment maintains its own personnel registry— Commission on Effective Governancesince these are not cross-checked, the (PCEG), DBM, and CSC. In 2001, the PCEGpossibility 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 Officeagencies 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 also1.07 million permanent employees are paid issued orders directing GOCCs and govern-from the national budget. Adding about ment financial institutions (GFIs) exempted350,000 local government employees and from the Salary Standardization Law toabout 90,000 GOCC employees, total public standardize their pay practices and makeemployment comes to 1.5 million. This senior officers’ compensation comparableconstitutes almost 2 percent of the popula- with counterpart positions in nationaltion—higher than, for example, 0.1 percent agencies. The fiscal impact of these measuresin China and 0.3 percent in Vietnam. At the has been minimal, and further negated bynational 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, theDepartment of Health, the court system, and Proliferation of agencies, functional duplica-the Department of Environment and Natural tion, and overlaps among agencies andResources. Ironically, however, amid the within and between departments compoundgeneral overstaffing, staff shortages are the problem of high personnel costs. Someemerging in key professional categories agencies seem to be overstaffed, while some(such as auditors, lawyers, and information are also overlayered, with too much middletechnology professionals). In addition, an management. There are staff surpluses in 2
  3. 3. many functions and staffing shortages in significant milestones. At the same time,others. Equitable distribution of staff across civil servants in benchmark positions inregions and provinces is an issue. Overlap lower grades tend to be somewhat overpaidand 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 aagement to achieve greater public sector growing abundance of increasingly perverseefficiency comprises the next set of chal- and nontransparent “allowances”, especiallylenges confronting the new Government. in GOCCs and GFIs. Pressure to contain theTwo issues are key: (i) compensation and defined benefit pension bill has resulted inincentives, and (ii) merit-based recruitment growth of unconsolidated “allowances”and appointments. rather than increased basic salary. In addi- tion, productivity and performance pay hasStrengthening 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 otherCompensation levels are inadequate for hand, geographic differences in pay andattracting, retaining, and motivating civil allowances have been abolished. But this hasservants in critical jobs. The single civil led to an unintended consequence: nationalservice salary schedule, with 33 grades each government staff in regional offices are nowwith eight steps, is coming under increasing better off in real terms than their Metropressure. Many GOCCs and GFIs have Manila counterparts, and experienced staffalready broken away, fuelling pressures. are now reluctant to move to the nationalFiscal pressures have led to numerous capital area from regional offices. The resultentities being granted exemptions from salary is an inefficient system, cumbersome tostandardization on the basis of their revenue- administer and vulnerable to abuse.generating capacity. These exemptions havecreated a special class of civil servants whose Lack of meritocracy in the civil service,compensation has increased disproportion- especially at higher levels, has lowered civilately to those covered by the Salary Stan- service morale and capability. Politicaldardization Law. This debasement of the influence and the spoils system still holdsalary standardization principle enunciated in sway in appointments to senior and otherthe Constitution has demoralized civil career positions. Open selection for careerservants, and constitutes part of the reason executive positions continues to be eroded bywhy national government agencies com- political influence. This is exacerbated by thepletely dependent on the budget are finding it fact that the President appoints no less thandifficult 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, 1,650surveys suggest that salaries for senior civil prosecutors, and 500 other positions createdservants may be as little as 20 percent of by special laws.2 As a result, the Philippinesprivate 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 toprivate sector salaries. bureau directors, regional directors andLow wages potentially also pose governance 2risks to the extent that they may be associ- Judicial interpretations have also perpetuated the discretionary nature of the power of appointmentated with absenteeism and corrupt practices. by defining appointment as a “political questionCivil service salaries are also compressed— involving considerations of wisdom which onlythey hardly allow room for reward and the appointing authority can decide.” 3
  4. 4. service directors. In contrast, most East Addressing political economy challengesAsian countries make such appointmentsonly to the top two tiers. At present there are The political economy challenges associatednumerous positions of confidence, while the with CSR are substantial. The politicalpractice of offering ‘courtesy resignations’ executive exerts wide-ranging influence onwith changes of administration creates the civil service structure and actions through anpotential 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 ofcosts have been hindered by overlapping assignment. Changes in national administra-CSC and DBM mandates. The CSC and tion are invariably accompanied by sweepingDBM currently deals with civil service changes in civil service staffing. An impor-employment and compensation issues. The tant part of this phenomenon is traceable toCSC 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. Civiloversee implementation of all aspects of civil service rules, which preserve only rank butservice policy, including compensation not specific assignments, pose no obstacles topolicy and personnel management. The CSC the arbitrary replacement of incumbents.is slowly building up its capacity to effec- Second, the weak and subordinate position oftively perform its constitutionally mandated the civil service is reinforced by largerole of formulating and overseeing imple- differentials between private-sector andmentation of all aspects of civil service public-sector pay and the gap in social statuspolicy, including compensation and person- between holders of political positionsnel issues. At the same time, the DBM also (whether elected or appointed) and theirdeals with budgetary pay and employment rank-and-file civil service subordinates. Inissues. Such overlapping responsibilities and such circumstances, it is a rational responseturf 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 toagencies, despite the intention of the leader- accommodate “political decisions”.ship of each agency to contain civil serviceemployment and costs. The Bureau of Internal Revenue (BIR) exemplifies the governance challenges andAn outmoded and ineffective legal and complexities of CSR in the Philippines. Whileintegrity framework is a major constraint in the BIR is technically a bureau under themoving toward a modern and professional Department of Finance, the Secretary ofcivil service. The CSC has prepared an Finance has traditionally had little influenceupdated draft of the new Civil Service Code, over the selection of the BIR head and littlewhich is currently under legislative review. supervision over BIR functioning. TheThe Code seeks to promote efficiency and appointment of the BIR Commissioner hasprofessionalism through merit-based recruit- traditionally been regarded as among thement, performance evaluation, and promo- significant presidential political appoint-tion; make compensation more competitive ments. The Commissioner, though not ofand performance-linked within fiscal con- cabinet rank, serves at the President’sstraints; protect upright civil servants in the pleasure. Hence the leadership of the BIRdischarge of their functions; and give changes with every change in administration.stronger accountability and integrity mecha- The BIR head in practice traditionally reportsnisms. In addition, the PCEG has formulated directly and justifies his or her performancean integrated anti-corruption strategy for the to the President. This has removed the BIRGovernment aiming, among other things, to from the usual discipline of regular linestrengthen integrity in the civil service. agencies of its own level and those immedi- ately above it, and designated it as an area of 4
  5. 5. large potential rents. As a result, the BIR is term nature of these reforms, draws onan agency in which—with honorable excep- support from the political leadership and thetions—corruption has become entrenched. public, and involves stakeholder consulta-Changes in regime and of political principals tion.may have little impact on the actual practiceof and extraction rates from corruption on the Suggestions for priority actionsbureaucracy’s part. What occurs is merely areassignment of established rents from old to The new Government plans to aggressivelynew principals. Lastly, the BIR has also promote growth and combat poverty. Therefused to be audited by the otherwise key fiscal management challenge here is topowerful Commission on Audit. sustain the level and improve the efficiency of poverty-reducing public expenditures. ToThe source of the rents extracted by corrupt do this, it would be desirable to first containBIR officials is found in the discretion the fiscal weight of the civil service wageexercised by BIR staff over taxpayers. This bill. A reallocation from PS to MOOE couldpower takes the form either of exempting improve the effectiveness and efficiency oftaxpayers from their legal liabilities, or in the government spending, especially in sectorsselective 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 andpayment of corporate and personal income then reduce the fiscal weight of the wagetaxes and of value-added taxes. This, plus the bill. Incremental measures are no longerinherent complexity and opaqueness of tax enough. A two-pronged action plan to controllaws (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 certainfide tax payments to privately owned bank other items. Roughly 18–20 percent of theaccounts; nonremittance and diversion of tax PS allocations across the national budgetrebates for small-wage earners; and a brisk are “flexible”. This exercise could bebusiness 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 theirretirement.) 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 legislationoutings) also reinforce the “insider” culture. and a costed action plan in 2004. Work on a review of the compensation andA sustainable medium-term civil service severance policy is already under way.reform strategy will have to take political Developing an appropriate severanceeconomy challenges into account. Fiscal package entails amending existing legisla-pressures can provide an entry point for tion. This will have to be preceded by anshort-term civil service reform actions. exercise to realistically calculate the fiscalAlone, they cannot sustain the institutional impact of such a measure, how it can bereforms that aim to strengthen civil service financed, and over what period of timemanagement, professionalism, and integrity. such an exercise could be implemented.These require a strategy that takes into The CSC and the DBM are equipped withaccount the political complexity and long- modeling tools to undertake the technical 5
  6. 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 beencivil service could be a launching pad for under legislative scrutiny for a while.strengthening civil service professionalism Regardless of whether such legislation isand 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 ofsuch downsizing, for which sources of financing earlier reform attempts can now provide awill have to be identified. It is important to realizethat rightsizing employment while paying solid foundation for a more realisticseverance will not lead to short-term budgetary reform strategy and sequencing. Previoussavings. attempts indicate that (i) there must be strong 6
  7. 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 resulthigh-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 desirabletake the technical lead, coordinate with other to provide an allocation in the 2005agencies, and provide logistical support to budget to initiate installation. Thethe PCEG, and (iv) sequencing and prioritiz- database is intended to have a unique linking reform actions could make the difference for each employee to a correspondingbetween success and failure. Consultations authorized position of each agency. Thosewith stakeholders, such as legislators and persons who cannot be assigned to a postemployee 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 asengineering and downsizing efforts unac- an additional cost for which appropriatecompanied 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 besuch efforts in the past. Successful imple- shown as vacant, indicating a potentialmentation 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 stepinitiatives. toward remedying the establishment con- trol problem.Over the medium term, two sets of actionsto 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. 8. Figure: Philippines: Structure of Public Employment, 2002 TOTAL PUBLIC EMPLOYMENT 1,531,430 GENERAL GOVERN- GOCC/GFI MENT 90,641 1,440,789Armed Total Civilian Total LGUForces 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
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