PFC AWARD PUNJAB

1
FINANCE DEPARTMENT
PFC AWARDPUNJAB
LUMS
JUNE 01, 2005
2
SCHEME OF PRESENTATION

• Background to PFC
• Provincial Finance Commission
• Legal Provisions
• Mechanism for Approval of Award
• PFC Interim Award
• Issues with the Interim Award

3
PFC LARGER CONTEXT

• The functioning of the Provincial Finance
  Commission needs to be understood in the larger
  context of inter-governmental resource transfers
• The transfer systems are itself dependent on the
  issue of assignment of functions to various
  levels of government.

4
THE ISSUE OF ASSIGNMENT

• What should be the division of functions and
  powers among various levels of government?
• Taxing, spending and regulation be exercised by
  which levels of government?

5
THE ISSUE OF ASSIGNMENT ..Contd
BASIC PRINCIPLES

• Efficiency
• Ensuring that the economy is operating with
  economic efficiency
• Cost effectiveness
• Assigning functions to a level of government
  which may perform these at least social and
  economic cost
• Equity and Redistribution
• Public welfare for all (every one should benefit)
• Regional / local preferences may be catered for

6
THE ISSUE OF ASSIGNMENT ..Contd
ASSIGNING FUNCTIONS

• Stabilization function (Central Government)
• Maintaining high levels of resource utilization
  (full employment) and stable price level
• Instruments monetary policy, fiscal policy,
  trade policy and public expenditure management
• Distribution function (Central and Sub-National
  Governments)
• Equitable distribution of resources
• Instruments progressive income taxation, direct
  or indirect transfers, minimum wage laws
• Allocation function (Central and Sub-National
  Governments)
• Identification and prioritization of needs
  (Scarcity)
• Instruments fiscal policy, public expenditure
  management and regulation

7
ASSIGNMENT OF RESPONSIBILITIES

• The Constitution assigns a major role to the
  federal government to impose and collect taxes
  from the people of Pakistan
• It assigns the function of providing most of the
  public services to the provincial governments
• This creates a surplus of revenues at the federal
  level and deficit of revenues at the provincial
  level (vertical imbalance)

8
VERTICAL AND HORIZONTAL IMBALANCES

• The assignment of taxation powers creates a
  fiscal imbalance between the provincial
  governments expenditure on public services and
  resources available with them for funding these
  services

9
NATIONAL FINANCE COMMISSION
The National Finance Commission is the
constitutional body established to resolve the
issues of vertical and horizontal fiscal
imbalances in the federation of Pakistan
10
INTER-GOVERNMENTAL TRANSFER MECHANISIM IN PAKISTAN

• A system of distribution of resources between the
  Federal Government and the federating units and
  amongst the units. (Provinces) addressed by
  NFC
• A system of distribution of resources between
  Provincial Governments and the Local Governments
  and amongst the Local Governments . addressed
  by PFC

11
CONSTITUTIONAL PROVISIONS REGARDING NFC

• Chapter-1 of Part VI of the 1973 Constitution
  prescribes the framework for the distribution of
  revenues between the Federation and the
  Provinces.
• Article 160 of the Constitution provides for
  theconstitution of NFC.
• NFCs recommendation on approval by the President
  become the NFC Award.
• Duration of the Award should not exceed 5 years.
• NFC disbands after approval of the Award.

12
NFC AWARD 1996

• Ratio for distribution of Divisible Pool Taxes,
  after retention of 5 collection charges by the
  federation, between federation and federating
  units is as under
• Federal Government Share 62.5
• Federating Units 37.5
• The ratio of distribution of share (37.5) of
  divisible pool taxes between the federating units
  is as under
• Punjab 57.36
• Sindh 23.71
• NWFP 13.82
• Balochistan 5.11

13
PROVINCIAL FINANCE COMMISSON
14
COMPOSITION OF THE COMMISSION

• Ten (10) members
• 4 Ex-officio members-
• Finance Minister (Chairman)
• Secretary Finance
• Secretary LGRD Deptt
• Secretary PD Deptt.
• 3 professionals from private sector
• One Zila Nazim
• One Tehsil / Town
• One Union Nazim

15
PROVINCIAL FINANCE COMMISSION
LEGAL PROVISIONS

• PFC established under Chapter-XII-A, Section
  120-A of PLGO 2001
• This Chapter gives framework for distribution of
  revenues between the Provincial Government, the
  Local Governments, and amongst the Local
  Governments

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LEGAL PROVISIONS
Contd..

• Proviso Shares of local governments shall not be
  less than the funds transferred to LGs in FY
  01-02, excluding transfers in lieu of Octroi and
  Zila Tax
• Proviso monies received by the Government in
  lieu of Octroi and Zila Taxes shall be added to
  the Provincial Allocable Amount separately
• The PFC may recommend the making of
  grant-in-aid by the Government to the local
  governments from the Provincial Retained Amount

17
LEGAL PROVISIONS
Contd..

• The recommendations shall be based on the
  principles of
• Fiscal need
• Fiscal capacity
• Fiscal effort, and
• Performance

Finalized through a consultative process
18
LEGAL PROVISIONS
Contd..

• All decisions by a majority of members present
  and voting
• Provided that at least a majority of the
  professional members are present
• Provided further that the Chairman shall have the
  casting vote

19
LEGAL PROVISIONS
Contd..

• Award is valid for a period of three years
• Interim Award can be for the period to be
  determined by the Governor on the recommendation
  of the PFC

20
MECHANISM FOR APPROVAL OF THE AWARD
21
APPROVAL OF AWARD

• The Commission forwards recommendations to the
  Cabinet
• Cabinet to provide its views within two weeks
  failing which the Commission shall make its
  recommendations to the Governor

22
APPROVAL OF AWARD
The Commission may review the recommendations on
receiving the views of the Cabinet, if any, and
on finalization of its recommendations shall
forward to the Governor
23
APPROVAL OF AWARD
Contd..

• On receipt of the recommendations of the
  Commission, the Governor shall, by Order,
  specify
• the Provincial Retained Amount,
• Provincial Allocable Amount, and
• shares inter se of the local governments
• The above shares shall be paid directly to the
  local government concerned

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APPROVAL OF AWARD GRANT IN AID TO LGs
Contd..

• The Governor may, by Order, also make grants in
  aid of the revenues of the local government in
  need of assistance
• Such grants to be an additional expenditure upon
  the Provincial Consolidated Fund after deduction
  of Provincial Allocable Amount

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• PROVINCIAL CONSOLIDATED FUND

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PROVINCIAL CONSOLIDATED FUND (PCF)

• PCF All revenues received
• all loans raised
• all moneys received as repayment of any
  loan
• BY THE PROVINCIAL GOVERNMENT

Article 118(1) of the Constitution
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CONSOLIDATED FUND
Provincial Allocable Amount

• Provincial Retained Amount

Common Expenditure Charged Expenditure
PFC Award
Expenditure on Secretariat Provincial
Departments
Individual Shares of Local Governments
Grants to LGs from Retained Amount
28
PFC INTERIM AWARD 2002-03
29
PUNJAB INTERIM AWARD

• Fiscal need is the basis to determine current
  expenditure
• 2.5 GST allocated as a straight transfer in lieu
  of Octroi Zila Tax on 1999 frozen level
• Development Expenditure transferred amongst the
  Local Governments through a formula

30
INTERIM AWARD OF PFC

• Basis Fiscal need and Resource availability
  (current revenue)

(Rs. in billion)
31
INTERIM AWARD OF PFC
Contd..

• (Rs. in billion)
• BE 01-02 BE 02-03 BE-03-04 BE 04-05
• Current Expenditure 34.017 44.049 51.000
  56.618
• 2.5GST (Provincial) 6.160 6.962 9.000 9.000
• Development Expenditure 9.000 9.000 9.000
  11.000
• Total 49.177 60.011 69.000 74.618
• As age of Provincial
• Consolidated Fund 33.80 39.80 40.00 40.45
• Formula (Current expenditure Development
  expenditure) divided by (General
  Revenue Receipts Grants/Reimbursements)
• Note Additional tied development grants would be
  available from foreign
  assistance.
• Rs.54.618 budgeted balance for shortfalls
• Regular Rs. 9 b Grants Rs. 2 b

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METHODOLOGY OF DISTRIBUTION OF DEVELOPMENT FUNDS
TO THE DISTRICTS IN PUNJAB
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ALLOCATION OF DEVELOPMENT FUNDS
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DISTRIBUTION OF DEVELOPMENT FUNDS

• Development funds distributed as under
• District Governments 75
• TMAs 25
• Further distribution amongst the TMAs of a
  District is done according to the population
  share of each TMA in a district.
• Grant in lieu of Octroi (part of 2.5 GST) is
  transferred to TMAs as straight transfer.
• During FY 2004-05, 2.5 GST in lieu of OZT
  (frozen level) was estimated at Rs.6.92 billion.

35
DISTRIBUTION OF DEVELOPMENT FUNDS
Contd..

• The component of 2.5 GST comprising the
  abolished Goods Exit Tax (GET) is being released
  _at_ Rs.60,000 per month to each Union
  Administration
• For Union Administrations of City District,
  Lahore the rate is Rs.180,000 per month

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RELATIVE WEIGHTAGE OF DISTRICTS FOR ALLOCATION OF
FUNDS - INDICATORS
37
RELATIVE WEIGHTAGE
Contd..
38
RELATIVE WEIGHTAGE
Contd..
39
RELATIVE WEIGHTAGE
Contd..
40
LIST OF INDICATORS FOR DEVELOPMENT RANKING OF
DISTRICTS 2002

• Agriculture
• Crops
• Share of Districts in Value of Major and Minor
  Crops Output
• Livestock
• Adult Animal Units Per Capita
• Value of Milk Production Per Capita
• Poultry Birds and Poultry Production Per Capita
• Forestry
• Aggregate Score of Compact Plantation and Linear
  Plantation
• Fisheries
• Value of Fish Production Per Capita

41
LIST OF INDICATORS
Contd..

• Industry
• (Aggregate Score of No. of Industrial Units and
  Per Capita Value Added)
• Services Sector
• Percentage Share of Districts in Services Sector
  Labour Employment
• Education
• Literacy Rate
• Health
• No. of Doctors Per 1000 Population
• No. of Hospital Beds Per 1000 Population
• Extent of EPI Coverage
• Housing
• Proportion of Kacha-Pacca House
• Proportion of Households Having Electricity
  Connection
• Proportion of Households Using Gas
• Proportion of Households Having Piped Water Supply

42
LIST OF INDICATORS
Contd..

• Sewerage and Drainage
• Proportion of Urban Households Covered by
  Sewerage and Drainage Scheme
• Proportion of Villages Covered by Sewerage and
  Drainage Scheme
• Roads and Transport
• Length of Highway, Provincial, Agricultural and
  Other Department Provincial Roads/Square Mile of
  Geographical Area
• Motorcycles/Car Per 100 Households
• Other Public Transport (Tax, Auto-Richshaw,
  Buses, Vans, etc.) Per 1000 Population

43
BALOCHISTAN PFC AWARD (INTERIM)

• Allocable amount to Local Governments 31
• Resource distribution formula amongst districts
• Population 50
• Area 50

44
SINDH PFC AWARD (INTERIM)
Allocable amount to Local Governments
40 Resource distribution formula amongst
districts Population 50.0 Backwardness 17.
5 Tax collection 7.5 Transitional
transfers 25.0 Total 100
45
NWFP PFC AWARD (INTERIM)
Allocable amount to Local Governments
40 Resource distribution formula amongst
districts Fiscal equalization 10 Balance 90
Population 50 Backwardness 25 Lag in
infrastructure 25 Total 100
46
Equity in Per Capita Federal Transfers to the
Provinces FY 2001-02
(Rupees)
46
47
47
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ISSUES WITH INTERIM AWARD

• How to Increase the share of Local Governments?
• Utilization of funds and its impact on provincial
  resources?
• Revenue flows may not address Policy Priorities
  (only few programs covered)
• Should all 33 indicators configure in
  determination of development / under development
  or should it be configured to few indicators? If
  so, then what?
• Important indicators ____ Education, Health,
  Sewerage and drainage, Communication (roads),
  Rural Electrification, Housing, Access to potable
  water

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ISSUES WITH INTERIM AWARD
(Contd..)

• What period of time should be given to remove the
  anomaly of interim development expenditure vs.
  real development expenditure?
• Complex formula does not necessarily mean more
  equity but requires large effort for updating
  variables
• MTBF issues
• Incentivizing performance e.g. improved financial
  management
• Systemizing extra PFC grants

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THANK YOU