The Local Government Code in 1991 has mandated the Local Government Units (LGUs) huge responsibility in carrying out devolved functions and services. A major component of LGU revenue sources is their share from the Internal Revenue Allotment (IRA) which is necessary to carryout such devolved services.

Under the LG Code, at least 20% of IRA should be set aside for development projects to be used for specific programs, projects and activities in furtherance of the development agenda of the government.

Over the years, it is observed that LGUs specially the lower income classes are dependent on IRA. Thus, the national government deemed it imperative to establish a performance-based incentive policy that would help rationalize national government’s intergovernmental transfers to LGUs towards improving local performance in governance and delivery of basic services.

To operationalize the Performance-Based Incentive Policy, the Department of the Interior and Local Government (DILG) initiated a program called Local Governance Performance Management Program that will help stimulate local governments to put premium on performance in order to avail themselves of financial support to jumpstart and sustain local economic development initiatives for poverty reduction in their localities. The program is carried out through a financial subsidy facility called the Performance Challenge Fund (PCF).

The Performance Challenge Fund (PCF) is a facility envisioned to help stimulate local governments to put premium on transparency and accountability to enable them to avail themselves of financial support to jumpstart and sustain local socio-economic development initiatives supportive of national government goals and priorities.

Basically, it is an incentive fund to eligible LGUs in the form of counterpart funding for local development projects in the Annual Investment Program (AIP) and funded out of the 20% Local Development Fund (LDF).

In 2010, PCF was initially implemented in 4th to 6th class municipalities providing financial subsidy to 30 municipalities. In 2011, the national government allocated P500 Million designed to cater to a larger number of less able local governments.

The PC Fund aims to:

1. Encourage convergence of local development projects with the government’s priority programs for the achievement of the Millennium Development Goals (MDGs); tourism and local economic development thru road network maintenance; and compliance to the objectives of the Philippine Disaster Risk Reduction and Management Act of 2010 and the Ecological Solid Waste Management Act of 2000; and
2. Recognize LGUs exhibiting good performance in internal housekeeping particularly on the areas of transparency and accountability, planning, fiscal management, and valuing performance monitoring.

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