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Of all the provincial budgets announced thus far, the one from Khyber Pakhtunkhwa is the boldest and most forward-looking. For Sindh and Punjab, it is business as usual in spite of a change in finance minister in both provinces. But the PTI government in KP province is doing something the others have been unable to do in seven years: they are betting one third of their total expenditures on the local governments.
Here is what the numbers look like. Under the general public service head, which includes the cost of maintaining and running the provincial government, expenditures have been increased by 142pc. Last year, the provincial government budgeted Rs79 billion under this head but actually spent Rs70bn. This year the allocation is a massive Rs177bn. About Rs100bn of this is for transfers to the local government.
Additionally, in the annual development plan, there is an allocation of Rs18bn for local government capacity building. Then there is an additional district development plan allocation of Rs30bn, to be distributed amongst local government office holders to devise their own development plans.
This adds up to Rs148bn out of total budget outlay of Rs487bn that will be devolved to local governments next year.
This is a revolutionary step, and at a time when Sindh and Punjab have both presented very routine budgets, with their business-as-usual large allocations for mega projects and ‘social protection’ schemes in Sindh, KP stands out as the only provincial government taking a large risk and betting on the devolution of power to local levels as the way to bring about change. If this bet pays off, and there is perceptible material improvement in the quality of service delivery, the pay-off can be huge for the PTI in the next polls.
But there is one big problem that stands in the way: the revenue plan to back up this massive bet inspires little confidence. The budget sees expenditures hiked by Rs83bn, or 20pc, from last year. But most of the additional revenue is coming from areas that are experimental revenue lines or from sources that have been historically unreliable.
Here are some numbers from the revenue side. The largest source of revenue for the province, as with all provinces, is what they call the federal tax assignment, or funds transferred from the federal government under the NFC award. These total Rs260bn, where last year’s budget estimates were Rs227bn.
KP has taken a revolutionary step at a time when Sindh and Punjab have both presented very routine budgets.
But beyond the federal transfers, the province’s own revenue increases are largely coming from three heads. One is what they call Net Hydel Profit (NHP), which is money supposed to be paid to the KP government from the profits made from the generation of hydroelectric power from powerhouses located within the province. Last year, they budgeted Rs12bn from this head and actually received Rs9.4bn. This year they’re budgeting Rs17bn.
But the largest component of NHP is arrears. Under an old deal, dating back to the 1990s and revisited in 2005, the province is supposed to get arrears on all hydroelectric power generated from its waters from the early 1990s onwards.
Last year, they were claiming Rs32bn as arrears and next year these have risen to Rs52bn. Historically, the provincial government has had a very difficult time actually getting the federal government to release these funds, and last year they received nothing under this head.
The reason the provincial government is optimistic about receiving this amount this year is that as of April a draft agreement was reached with the federal government that resolved some outstanding issues regarding NHP payments. Once the draft agreement is vetted by the law ministry, they’re hoping payments will resume.
Looking at the other revenue heads reveals something interesting. Provincial taxes are just under 42pc of total provincial revenues, which come in at Rs54bn. The rest is non-tax revenue where the bulk of the incremental revenue from next year is supposed to come from.
Non-tax revenues have been budgeted to triple next year, going from Rs10bn in the last budget to Rs31bn this year. By comparison tax revenues are going up by 16pc. So where is the massive increase in non-tax revenue going to come from?
Two heads account for almost the entire increase in provincial own revenues, and they are unusual ones. One is forestry, which was budgeted to yield a paltry Rs770 million last year, but is budgeted to yield just under Rs8bn next year. That’s a 10-fold increase in one year! Second is housing, which was budgeted to yield no revenue last year, but is now expected to yield Rs14bn. These two heads alone explain the entire hike in non-tax revenue.
So what’s happening in forestry and housing to make them such massive cash cows for next year? Apparently, there is a public private partnership programme of sorts with land developers to develop Peshawar model city and one other project in which government land will be used by private sector developers to build housing schemes. In forestry, they are expecting the additional revenues from the felling of dead trees, what they call ‘dry windfall’, as well as levying penalties on illegal timber felling. Both of these revenue heads have question marks hanging over them.
Most other revenue heads are showing marginal changes. Little effort is being made to develop direct taxes as a source of provincial revenue, with most tax increases coming from the provincial GST, a trend shared by all the other provinces.
Nevertheless, the PTI government has announced a budget that is a radical departure from business as usual because it carries the process of devolution of power to its logical end. In doing so, it has credibly embarked on a transformative programme that its rival parties in Sindh and Punjab have only talked about, but not delivered despite being in power for seven years now. One wishes them all the best in this bold new venture they have started.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, June 18th, 2015
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