By Manuel Mogato
MANILA (Reuters) - A scandal over lawmakers' misuse of public funds has become the biggest crisis of Philippine President Benigno Aquino's three-year rule, tainting his carefully crafted image as a corruption fighter and undermining his ability to push economic reforms.
Aquino has struggled to keep the scandal at arms length since late July, when a whistleblower revealed that some lawmakers, including the president's allies, were stealing up to half the money being allocated to local projects from discretionary government funds.
While corruption allegations are far from new in the Philippines, the revelations have struck a chord with Filipinos because of the scale of the wrongdoing and the shock that little had changed despite Aquino's reform drive.
Aquino, the only son of democracy icon and former president Corazon Aquino, has tried to tap into the public mood by saying he too is outraged by the corruption, which was corroborated in a detailed report by the state auditing body.
But the allegations have drawn closer to the presidency, suggesting Aquino has failed to convincingly tackle a culture of political patronage that centers on the $586 million Priority Development Assistance Fund (PDAF), widely known as the "pork barrel". His popularity rating plunged by 15 points in a recent opinion survey to 49 percent.
The focus has now shifted to a separate development fund set up quietly in 2011 by Aquino's administration, the Disbursement Acceleration Program. Among its disbursements were transfers totaling 1.1 billion pesos ($25.5 million) to 18 senators last year after they voted to impeach the Supreme Court chief justice, who was seen as an Aquino rival.
Aquino has vehemently denied allegations this amounted to political bribery, accusing his opponents of trying to distract attention from the real scandal.
"I have never stolen. I am not a thief. I am the one who goes after thieves," Aquino said in a national television address on Wednesday night to explain his position.
GREASING THE WHEELS
Aquino, 53, won office on a platform of curbing the corruption that has drained government coffers and entrenched poverty in the Philippines, a country of 97 million people.
Since then the Philippines has recorded strong growth, improved its public finances and been awarded investment grade ratings, partly dispelling its "sick man of Asia" reputation.
Investors cite the anti-corruption drive as an important reason for the growing belief the rebound is sustainable.
Indeed, the Philippines' position on Transparency International's corruption perceptions index has improved, rising to 105th out of 176 countries and territories last year from 129th in 2011, overtaking Indonesia and Vietnam. A higher ranking means a cleaner public sector.
Aquino said in July that the country loses 200 billion pesos a year to corruption, or about 1.8 percent of economic output.
"The mistrust will affect confidence, and confidence affects investors' perception," said Astro del Castillo, managing director of Manila-based investment house First Grade Finance Inc.
The president has taken a tough line on tax evaders and launched criminal cases against former officials, including his predecessor Gloria Macapagal Arroyo, her family and allies.
Aquino led efforts to remove the head of the anti-graft agency on allegations of corruption while the anti-corruption agency ombudsman filed graft charges against police generals over the inflated price paid for helicopters and the fake repair of armored vehicles.
But the current scandal shows how discretionary funds are a crucial mechanism for controlling the two-chamber Congress in a country where party loyalties are weak.
After initially resisting calls for "pork barrel" reform, Aquino announced in August that he would abolish for next year the PDAF of 70 million pesos for each lower-house member and 200 million pesos for each senator, a total of 25.2 billion pesos ($586 million).
The funds are meant for local development projects such as schools, health centers and road construction, as well as for the distribution of medicine and fertilizer.
The abolition of the fund could severely inhibit Aquino's ability to push through reforms such as a planned increase in mining taxes seen as crucial to attract investment into the moribund sector. It could also delay implementation of a complex peace deal to end a long-running Muslim rebellion in the resource-rich south.
"The executive needs the pork as badly as the legislature because the executive needs laws to be passed; he needs elbow room to convince these legislators," Leonor Briones, a former national treasurer, told Reuters.
Filipinos were shocked by media accounts of the opulent lifestyle of the woman who is suspected of running a massive kickback scheme for lawmakers.
Janet Lim Napoles, the wife of a former Marine major, has been accused by the Department of Justice of setting up fake non-government organizations that since 2007 received lawmakers' pork barrel funds and then routed the money back to them.
The whistleblower, a former associate of Napoles, testified to the Senate in a public hearing that the businesswoman received so much cash she would stash it in the bathtub of her luxury Manila home. Napoles was arrested and charged with plunder in September, along with 30 others including three senators and five former congress members.
Before her arrest, Napoles denied involvement in the scheme and said her wealth came from her family's investments in coal mining in Indonesia.
The accusations that Aquino himself used public funds to buy off senators has forced him on the defensive and distracted him from his economic agenda. Last week, he reorganized his communications staff and reduced the exposure of two spokespersons who had struggled to deal with the media.
The scandal has also sharpened questions over how much Aquino has achieved since he took power in 2010. Despite investigating hundreds of tax evasion and smuggling cases, his government has yet to win a single conviction.
Critics say Aquino has failed to support reform measures to reduce the influence of money politics, such as the pending anti-graft Freedom of Information Act. They also say his efforts have targeted political foes far more than allies.
"This perception endangers what gains he has made in the past three years and curbs the potential for any sustained gains in the long-term fight against corruption," said Mars Buan, senior analyst at Pacific Strategies and Assessments in Manila.
(Editing by Stuart Grudgings and Dean Yates)