Fiscal devolution

Published December 20, 2021

The government has given an undertaking to the International Monetary Fund (IMF) to curtail the federal Public Sector Development Programme (PSDP) by Rs200 billion this year besides a Rs50bn cut on special grants in addition to more taxes. The IMF programme entails the sustainability of public investments beyond the current fiscal year amid a serious resource crunch.

That set the centre to look for a permanent financial cushion and find the straitjacket implementation of constitutional and fiscal devolution as one of the solutions. The centre already has an oblique arrangement with the provinces under which it secures Rs250-350bn cash surplus from provinces to finance the fiscal deficit and has indirectly established the fact that the provinces had secured higher than required resources under the 7th National Finance Commission Award 12 years ago.

Its debt servicing costs have since been increasing, particularly in recent years, in addition to overstretched fiscal commitments for some political programmes and it wants to shed that extra load. Three major areas, hence, appear to be in the line of fire. They include centre-provincial projects partly or fully funded out of PSDP, followed by so-called SDG funding and housing projects.

The ministries of finance and planning have firmed up plans to shift to the federating units the financial burden that now stands at above Rs320bn

To begin with, the ministries of finance and planning have firmed up plans to stop financing provincial development projects, particularly those relating to devolved subjects, to shift to the federating units the financial burden that now stands at above Rs320bn.

The centre has also funded about Rs235bn worth of SDG schemes since 2014-15 including Rs56bn disbursed this year to keep parliamentarians happy.

This is part of a new National Development Framework (NDF) under which the federal government wants to restrict its investment priorities to the areas of federal responsibilities and ensure that the provinces take full fiscal responsibility for all devolved subjects.

After the 18th Amendment in the Constitution and the abolition of the concurrent list, the subjects of about 16 defunct ministries along with development projects were devolved to the respective provinces. Thereafter, the financing of provincial nature projects was the responsibility of the concerned provinces. Funding for such projects was discouraged through the PSDP except for core vertical projects of health and population till 2017.

Subsequently, the provincial projects have been inserted back into the federal PSDP and captured substantial fiscal space leaving scarce resources for important federal projects. This trend has resulted in thinly spread allocations causing time and cost overrun of projects of national significance.

In PSDP 2021-22, about 331 projects are provincial in nature, costing Rs1.151 trillion with Rs341bn expenditure and allocation of Rs320bn which the finance and planning divisions believe should ideally be financed by the provincial governments through respective annual development plans (ADP) in the wake of the 18th Amendment and 7th NFC Award.

The portfolio of the Ministry of Housing and Works (MOHW) has increased manifold with the incursion of provincial nature schemes and has adopted characteristics of provincial ADPs. During PSDP formulation, MOHW demanded Rs44.5bn (Rs9.3bn for 58 ongoing projects and Rs35.2bn for 206 new projects) for PSDP 2021-22. In addition, a number of approved projects, as a backlog is also pending funding.

“Moreover, various references have been and are being received from the Prime Minister Office for the financing of provincial nature projects proposed by various quarters through federal PSDP,” records suggest.

The ministries of finance and planning are resisting the addition or approval of small nature schemes and want these to be avoided. They want these small schemes to be either be financed by the provinces concerned or through the SDGs achievement programme which is tailored to finance such schemes and they have a point.

To contain the incursion of provincial nature projects, the National Economic Council (NEC) in June 2021 approved policy guidelines regarding processing and approval of provincial nature projects for financing from PSDP which had been notified by the planning division in August. The policy inter-alia provides that due to financial constraints and financing of mega projects of national importance by the federal government, it may not be possible to continue financing provincial projects unless costs are shared by the provincial governments, only capital investment in projects located in deprived areas may be considered.

It further stipulates that provinces bear the cost of land acquisition, resettlement, provincial taxes, cost of project monitoring units and that the provinces take over the projects after completion for sustainable operation and maintenance.

The provinces are thus expected to fully finance provincial nature projects since substantial funds were transferred to the provinces under the 7th NFC shares and onwards. Nevertheless, to supplement the efforts of the provincial governments, the federal government continued to finance the social sector related schemes through Millennium Development Goals /SDGs programme, they argue. From 2014-15 onwards, about Rs233bn have been allocated for the programme to finance small nature schemes falling in various sectors like education, health, sanitation, local roads etc in the provinces.

The two federal ministries want the policy approved by the NEC to be dovetailed with the NDF currently under preparation as guiding principles for the provinces and federal ministries for undertaking the development projects in accordance with assigned Rules of Business and division of subjects after the 18th Amendment.

Depending on the timing and political compulsions of election season nearing, how the plan goes ahead would have to be seen but some suggested guidelines would involve a lot of federal-provincial debate. The plan seeks to ensure that departmental development working parties particularly ministries of water resources and housing and works must not consider or approve the provincial nature projects and SDGs schemes. The provincial schemes under the Finance Division would be reviewed and rationalised over the next few weeks and “in case justified for federal funding, no further allocation beyond approved cost will be provided”.

The provinces would be required not to demand specific shares against the PSDP funds, as a prerogative, since federal PSDP is tailored to NDF focusing on national level projects prepared and approved by the ministries/divisions as per assigned Rules of Business. It is also proposed that in case of projects already being financed through PSDP including Covid-19 related projects etc the provinces would ensure and provide the counterpart funds through respective ADPs before requesting federal funding. The Finance Division will confirm the utilisation certificate of earlier released funds as a pre-requisite.

In case provincial nature projects/schemes are considered for funding, the concerned province should undertake funding at least to the extent of 50 per cent and commit its sustainability through provision for operation and maintenance, revision etc and funds for PSDP would only be released after provincial governments’ display that it has released its due share.

The Prime Minister’s Office would ensure the policy decision on provincial nature schemes and would refer such schemes proposed by the parliamentarians to the provinces concerned for financing through respective ADPs.

Published in Dawn, The Business and Finance Weekly, December 20th, 2021

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