National Irrigation Administration In The Philippines Finance Essay

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The National Irrigation Administration (NIA) is a government and controlled corporation which is primarily responsible for irrigation development in the Philippines. It is mandated to promote irrigation development, and management of water resources for irrigation in support of the government's policy of ensuring food security in the country.

It was created in 1963 with the main objective of achieving sustainable improvement in the operational efficiency of national irrigation systems to help increase agricultural production and small farmer's incomes, expand rural employment opportunities and contribute to the rural poverty alleviation. It also provides technical assistance to local government units (LGUs) in the implementation of communal irrigation projects. NIA provides irrigation facilities through modernization, repair/rehabilitation and construction of new irrigation systems. It helps the organization and development of Irrigator's Associations (IA) to manage the full operation and maintenance of irrigation systems and facilities.

In terms of cost increase, it has been observed by NEDA that a project implemented by NIA has at least one request for cost increase. Worse is that a certain project has requested for three cost increases which were all endorsed by the Investment Coordination Committee and were approved both by the government and by the donor agency. (Cost increase or cost overrun occurs when a project exceeds its allocated budget. The agency usually files a request with its justifications subject to the endorsement of the Investment Coordination Committee, and approval of the Cabinet Committee, with the President as the chair, and the donor agency.)

Underinvestment in the Maintenance of Irrigation Systems

According to Araral (2009), evidences show that NIA is under-investing in the maintenance of irrigation projects for the period 1990-2002. Spending for water delivery operations was 21 percent below recommended levels, canal clearing was 38 percent, and gate maintenance was below by 75 percent. Recommended levels are standards set by donor agencies like WB and JICA based on their engineering studies.

In a report prepared by the ADB in 2002, the Bank is aware of NIA's lower investment in water operations, canal cleaning, gate maintenance, communication, and equipment. The report shows that maintenance costs grew by 87 percent from 1990 to 2001 while the budget for O&M dropped by 27 percent from 1997 to 2002 (Araral, 2009).

Aside from ADB, in 2001 JICA also reported on the problem of NIA's under-investment in rehabilitation of irrigation infrastructure. The report clearly reveals rehabilitation needs of 61 percent of main canals, 56 percent of control structures, and 74 percent of access roads (Araral, 2009).

Performance Bottlenecks

From an institutional perspective, several problems relating to incentives, principal-agent relations, moral hazard, and Samaritan's dilemma are observed to affect NIA's behavior and its interaction with other development actors. Consequently, these hinder the effective and efficient performance of NIA as an agency promoting development.

Incentives Problems

The main incentive problem of NIA is that agency budget/resources are not related with agency performance. NIA is a government-owned and controlled corporation which means that it sustains itself through its own revenue-generating activities (irrigation fees, equipment rental fees, etc.) and does not depend on the government for its survival. This creates weak incentives for the agency to achieve good performance because it is not threatened by future budget cuts or staff retrenchment. Tapping external sources, i.e. ODA then becomes more worthwhile for the agency. At a micro-level, this can be compared with the employees of the agency whose low compensation/salaries do not provide them incentives to excel in their job. Thus, accepting bribes and other forms of corruption provides an opportunity to increase one's income.

NIA's revenue comes from irrigation fees, equipment rentals, management fee, communal irrigation, subsidies and others. Approximately one-third of its revenue is from irrigation fees. However, collection from irrigation fees remains low and is inadequate to finance operations costs. New loans in the form of rehabilitation projects become additional sources of revenue for the agency. Thus, creating incentives for the agency to delay or under-invest in the maintenance of irrigation systems as evidenced by the reports of ADB and JICA. Donors are aware of the practice of under-investment of the agency as stated in the two reports but they simply ignore it as this practice causes NIA to continue borrowing for their irrigation projects.

Incentives also play a big role in the behavior of the employees in the agency. The project managers, who know the history of approval of most of the agency's requests for cost increases, have strong incentives to delay implementation of projects or change the scope of the project so that they can actually justify request for cost increases. The additional funding creates a window for corruption in project management offices that directly handle and supervise the implementation of ODA projects.

Principal-Agent Problems

NIA is implementing several ODA projects on top of its locally-funded projects. The efficiency of the agency is affected not only by the number of projects it is implementing but also by the different principal-agent relations taking place. Within and outside the agency, there are different levels of principal-agent interactions such as between NIA and its PMOs/employees, NIA and the government, NIA and the donor agencies, and NIA and the citizens. The agency is accountable to the government and to the citizens for the locally-funded projects whereas it is accountable to the donors for the ODA projects.

Dealing with multiple principles makes it difficult for the agency to implement its projects because different donors have different objectives, systems, reporting requirements, etc. Meeting the needs of different principals affects the priorities and efforts of the agency.

Where NIA is the agent while the government is the principal, problem occurs because the government does not have the power to sanction/penalize the agent for its bad performance through budget cuts because the agency is not dependent on the government for its resources. Since the agency is still accountable to the government, it will deliver results but at an average performance.

Moral Hazard Problems and the Samaritan's Dilemma

Moral hazard problem occurs because NIA wants a steady flow of aid from donors to finance their expenditures whereas donors need NIA as a client to increase their loans portfolio. This creates strong incentives for NIA to under-invest in the maintenance of their irrigation systems because this means greater opportunities of receiving new loans from donors for rehabilitation or construction of new irrigation systems.

In loan agreements, donors usually require the agency to provide for the operations and maintenance of the system. But evidences show that the agency does not comply with this because the cost to non-compliance is very small and the agency knows that the donors will continue providing financing the projects because it is in their interest to do so.

Many projects implemented by NIA that requested for cost increase were approved by the Investment Coordination Committee (ICC) and by the donor agency especially the Japan International Cooperation Agency. As seen in the consistent requests for cost increase, it appears that NIA knows that its request will be approved anyway by the ICC and by the donor agency. Sometimes, though it is obvious that the cost increases are not justifiable anymore, the ICC approves of the request because it wants the project completed so it can deliver the intended outputs to the beneficiaries as soon as possible. On the other hand, the donor agency authorizes additional funding because they also want the project done. Moreover, they do not want to sanction the agency by not providing aid because it will cause more trouble in the recipient country which demonstrates the Samaritan's Dilemma faced by the donors. This dilemma makes the agency in a powerful position which results in negative outcomes/consequences.