1. The passage of the Local Government Code in 1991 has put the spotlight on Local Government Units (LGUs), particularly on the huge responsibility that was entrusted to them as well as the amount of resources that are now at their disposal to effectively discharge the devolved functions.
  2. LGUs’ share in national internal revenues called the Internal Revenue Allotment (IRA) has been increasing since 1991. For the period 2001–2008, the IRA accounted for 16.6 % of the total national government budget.  For 2010, LGUs stand to receive P265.8 billion which accounts for 20.3% of the total national government budget.
  3. 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.  For CY 2010, the 20% local development funds (LDF) of LGUs amounts to P53Billion.
  4. Per fiscal performance of LGUs from 2001-2008, the provinces are the most dependent on national government transfers followed by municipalities with 80% and 76, respectively, % of their resources are IRA. For cities, IRA accounts to less than half of cities resources.
  5. On February 20, 2009, the Development Budget Coordinating Committee (DBCC) approved the Performance Based Incentive Policy (Annex 1) which provides for an incentive framework to rationalize national government intergovernmental transfers to LGU towards improving LGU performance in governance and delivery of basic services. It seeks improvement in LGU performance by linking incentives to the achievement of a set of performance targets.
  6. In line with the Performance-Based Incentive Policy, the DILG initiated the Performance Challenge Fund to stimulate local government 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 Performance Challenge Fund for Local Government Units (PC Fund) is an incentive fund to LGUs in the form of counterpart funding to high-impact capital investment projects in the Annual Investment Program (AIP) and funded out of the 20% Local Development Fund consistent with national goals and priorities. It shall seek to rationalize national government intergovernmental transfers to LGUs, and encourage alignment of local development initiatives with national government development agenda and priorities.

Specifically, the PC Fund aims to:

  1. Recognize good governance performance particularly in  the adoption of “good housekeeping” along the  areas of governance and link with incentives and grants;
  2. Encourage alignment of local development investments program with national development goals and priorities to achieve the Millennium Development Goals (MDGs), boost local economic development and comply with Philippine Disaster Risk Reduction and Management Act of 2010 and Climate Change Adaptation Act of 2009; and
  3. Assist poor LGU in developing and implementing project for local economic development and poverty reduction.


The PC Fund shall be open to all provinces, cities and municipalities awarded with the Seal of Good Housekeeping provided that the LGU shall allocate counterpart fund to implement capital investment projects aligned with the national development agenda and priorities. 
LGUs may be targeted based on income class or alternative indicators of fiscal need (e.g., income/IRA per capita, poverty incidence) or level of LGU. Priority consideration to low-income LGUs and those with high poverty incidence


In order to qualify for the grant, target LGUs must comply with the eligibility criteria which is the test of the Seal of Good Housekeeping focused on:

  1. Sound Fiscal Management highlighting the absence of adverse COA Opinion on LGU financial statements
  2. Transparent and Accountable Governance putting value on the Full Disclosure