June 11, 2007	Monday	Jamadi-ul-Awwal 25, 1428

DISTRICT governments in the North West Frontier Province will get an increase of 15 per cent on their budgetary receipts from the provincial government in 2007-08.

The Provincial Finance Commission (PFC), which distributes resources between province and districts, finalised the volume of fiscal transfers to be made to local bodies in it meeting on June 2.

Sources in the Finance Department say the district governments will get a total sum of Rs29.412 billion on account of salary, non-salary, development and octroi and zilla tax grant.

Like in the past, fiscal transfers to the district governments will be heavily dominated by the salary component, leaving meagre resources on the development and non-salary heads.

Of the total Rs29.412 billion, the salary will eat up Rs23.971billion or 81 per cent of the expected transfers followed by Rs2.952 billion and Rs1.204 billion for non-salary and development expenditure.

Expected revenue receipts of the districts on account of Octroi and zilla grant will be around Rs1.285 billion.

The PFC is considered, by its architects, as an effective tool for fiscal decentralisation by ensuring an equitable distribution of resources between the districts and province subsequently enabling the districts to improve their social service delivery.

But, it is a big question whether the PFC had achieved the objectives it was constituted for?

Receipts on accounts of federal divisible pool, subventions, net hydro profit and provincial own revenue constitute the provincial divisible pool, which is divided into two portions i.e. provincial retainable and provincial allocable amount.

The provincial retainable amount is kept by the provincial government for liabilities relating to debt servicing, pension, and subsidy on strategic stock reserve of wheat, contribution to general provident fund, pension fund and operational budget of high court, provincial assembly and governor secretariat.

The provincial allocable amount is distributed among district governments and Tehsil Municipal Administrations (TMAs) through a multi-factor formula which gives 60 per cent according to population and 20 per cent each to poverty and lag in infrastructure.

Officials involved in the decentralisation process argue that the figures presented at the time of finalising the PFC award often mismatch actual expected fiscal transfers from the centre to the province.

For example, they explain, the award is finalised even before the provincial government receives details about the expected federal transfers ahead of provincial budget.

This means the PFC works out resource distribution between the province and districts on the basis of 10-15 per cent increase in the overall revenue to be available to the province rather taking the actual receipts, which is later projected in the provincial budget, as baseline for distribution of resources.

"This causes huge gap between resources and their further distribution, which subsequently provide fiscal space to the province but makes things difficult for the local bodies even to finance their current expenditures," said an official at the Local Government and Rural Development Department.

The district governments' grievance of being denied a fair share in resources could also be verified from the current provincial budget.

The NWFP government had projected Rs14 billion higher than the receipts of last fiscal year on accounts of federal transfers and subvention due to interim National Finance Commission (NFC) award.

But this increase is only benefiting the provincial government, as the districts' share on non-salary and development components remained stagnant though they assumed the role of a frontline service provider at grassroots level in the post devolution scenario.

The PFC is also responsible to improve financial health of the local bodies through measures such as lending matching grants etc.

The PFC did offer matching grants to local bodies, but real outcome of such arrangements are yet to be witnessed on the ground. A jointly prepared report 2005 by the Asian Development Bank and the UK Department for International Development (DFID), had found that the health and education services in the province suffered owing to poor quality and high cost.

The district governments, however, complain that maintenance and repair of hospitals and educational institutions are their responsibility, but the provincial government gives them nothing on this count, while larger resources are retained by the provincial government for its growing administrative set-up. The existing infrastructure is rapidly deteriorating in the absence of sufficient funds at the local level.

Unless a solution to the distribution of power between the province and the district governments is resolved, the chances of success of this experiment looks dim, say officials.

In line with the PFC award, the provincial government had allocated Rs100 million for the repair and maintenance of road infrastructure. This amount was supposed to be transferred to the district government, which is currently looking after 7,000 kilometre roads, as matching grants.

But not a single penny could be spent on this head mainly because none of the district governments could find matching funds for the repair and maintenance of roads falling within their ambits. The allocation in this head remained unspent.

Apart from making the matching grants ineffective in mitigating the financial woes of the local bodies, the PFC has also found it impossible to make the district governments put aside some portion of their development funds for the mega projects.

To prevent taxpayers' money from wastage, the PFC had restricted the district governments to allocate 40 per cent of the development funds for major projects in road and water supply sectors.

But not a single district has been able to do so because the district nazim has to have the proposals accepted by the district council first. Its members, who are nazim of the union council, want funds for their area and are least interested in the district's major projects.

In view of the response from the district governments, the PFC abolished such restriction giving a free hand to the districts to spend money where they wanted.

The district governments have inherited weak implementation mechanism for undertaking development tasks and utilisation of uplift funds doesn't exceed 40 per cent of the total allocation annually.

In line with current PFC award, the provincial government has earmarked Rs963 million for district Annual Development Programmes (ADPs), but during the first nine months of the current fiscal year their overall utilisation remained even less than 15 per cent.

This is mainly because the district governments do not have the capacity to utilise the allocated funds resulting in diverting money from inactive projects to those schemes, where funds spending is fast.

Officials concede a huge mismatch between functional responsibilities of the district governments and the financial resources available to them.

The district governments are excessively dependent upon provincial transfers, while they have a narrow tax base from which they are required to generate revenues for discharging their obligations.

The current PFC award did not identify the intra-local government transfer arrangements leaving the transfer of funds at the discretion of district government, which increases uncertainty in transfer of receipts to TMAs and Union Administrations.

According to these officials, this issue has partly been rectified when the Finance Department begun direct transfers of octroi and zilla tax grant and shares of development grants to the TMAs from 2005, but still the union council administrations are at the mercy of district governments.

The union council administrations often complain that they even did not get funds for current expenditures from district governments.

"This indicates that the PFC has badly failed to devolve fiscal authority at grassroots level subsequently affecting the service delivery," the officials remarked.

To achieve the desired results, the PFC has to revisit the resource distribution formulas and other fiscal measures being adopted for improving the social service delivery in the province.