July 10, 2007	Tuesday	Jamadi-us-Sani 24, 1428

RAWALPINDI, July 9: The Provincial Finance Commission (PFC) has not been performing its assigned functions under the Local Government Ordinance (LGO), 2001, and is allegedly creating hurdles in the smooth functioning of Local Governments (LGs).

According to a report compiled by the Pakistan Institute of Development Economics (Pide), the PFC, formed under the LGO 2001 for the equitable distribution of revenue between provincial governments and local governments, contains provisions that are not supportive of the devolution process and are not in accordance with the LG Ordinance, but the PFC has overlooked them.

The most important issue faced by the local governments, in resource distribution through the PFC award, is the definition of the divisible pool (DP). If the pool is not defined properly then the LGs tend to loose, as the balance always tilts toward provincial governments.

As far as the receipts are concerned, provinces have included the federal tax assignments, direct transfers from the National Finance Commission (NFC) and provinces’ own receipts in the divisible pool.

In some cases, the local governments’ receipts —education and health— are also included. Donor funds, that form the bulk of the development programmes, are excluded. Donor financing, through development policy lending, programme loans or through other budgetary support mechanisms, should be part of the divisible pool if parallel systems are to be avoided. The calculations show that approximately 50 per cent of the total budget receipts are excluded from the divisible pool.

On the expenditure side, the obligatory expenses that are excluded are: debt servicing, including payment of the principal amount, pension, subsidy on wheat, contribution to the GP fund, charged expenditure of the respective governor house, provincial assembly and high court.

The report says that these are valid expenses, which need to be provided for in all cases. However, over the longer term with the creation of the district service, the establishment-related costs, like pension payments, would need to be reviewed if incentives are to be provided to the local governments.

The Pide report states that the total Provincial Consolidated Fund (PCF) expenditure and receipts, as indicated in the provincial budgets, are considerably greater but the total divisible pool does not reflect the total amount. As observed from the provincial awards, each provincial government defines the divisible pool differently.

The division of the divisible pool into Provincial Retained Amount (for provincial non-devolved functions) and Provincial Allocable Amount (for LGs) is the next important stage, determining the share of LGs for their smooth functioning.

While the distribution should have been in accordance with the fiscal capacity and needs of local governments, the provincial governments base their calculations on three components —current budget, development and 2.5 per cent GST. Interestingly, the GST is added directly to the provincial allocable amount and is not part of the divisible pool.

The budgetary requirements need to be estimated, for both the provincial departments and the LG offices, to determine the vertical distribution. However, the PFC award generally focuses on the LGs only and generally provides them the bare minimum funds.

The provincial allocable amount is approximately 50 per cent of the net divisible pool and only 20-30 per cent of the total budgetary receipts. The fiscal capacities of the both provincial and local governments are not considered in the calculations of the share, thus undermining the share of LGs.

The current budget includes salary and non-salary components. The non-salary share of the LGs should be much more than that of provincial governments as the local governments’ staff are considerably more. However, according to the Pide report, the share of the provincial governments is considerably higher.

Further, on the current budget, the provincial governments are calculating the vertical distribution on the basis of actual posts or with minor variations. The savings due to non- recruitment of sanctioned posts of LGs accrue to the provincial governments. The amount saved should be given to the LGs. As provincial governments have no compulsion to recruit people, LGs also suffer as a result.

On the development side, no clear principal has been adopted under the PFC awards, for the distribution of the total development funds available at the provincial level between two governments. Ideally, it should have been on the basis of the historical ratio ie development budget spent on LG functions prior to devolution as a percentage of the total development budget.

The new LGs were to be compensated for the financial loss caused after the Octroi and Zila Tax (OZT) were removed, with the addition of 2.5 per cent to the GST and with an increase of 15 per cent, from 12.5 per cent the total addition, was to be transferred to the former LGs. Though the provincial governments are providing 205 per cent GST but the annual amount that was obtained from OZT has not been accommodated. Again, the LGs are the victims of this financial loss.

A review of the awards show that the TMAs and union administrations are not receiving the funds according to their functions and services they have to provide.

The report, in its conclusion, has marked the control of the PFC by the provincial finance department as a cause of not up-to- the-mark performance of the commission.

Further, the data on the source revenue generation and expenditure against the budget by local governments is not readily available and is not being properly consolidated at the district and provincial levels.

The report recommended that development needs to be reviewed and all local government functions, being performed through provincial ADPs, need to be transferred to the concerned LGs. The development budget is mainly controlled by the provincial governments.

The PFC needs to ensure that the awards are in accordance with the provisions of the LG Ordinance and that the funds are equitably distributed in relation to the assigned functions.