Provincial Budgetary Proposals...

Provincial Budgetary Proposals

2014-15

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IPR REPORT

June 2014

INSTITUTE FOR POLICY REFORMS

WORKING GROUP

Lead: Dr. Hafiz A. Pasha, Managing Director IPR, Former Finance Minister

Members:

1. Mr. Humayun Akhtar Khan, Chairman IPR, Former Commerce Minister

2. Mr. Abdullah Yousaf, Former Chairman FBR

3. Mr. Haroon Akhtar Khan, Director IPR, Former Senator

4. Mr. Ashraf M. Hayat, Executive Director IPR

5. Ms. Aaiza Khan, Research Associate IPR

6. Ms. Mehwish Gul, Research Associate IPR

IPR COPYRIGHTS No part of this publication can be reproduced or transmitted in any form or by any means

without permission in writing from the Institute for Policy Reforms

BOARD OF DIRECTORS

Mr. Humayun Akhtar Khan

Dr. Hafiz A. Pasha

Mr. Haroon Akhtar Khan

Dr. Khalida Ghaus

Mr. Ashraf M.Hayat

BOARD OF ADVISORS

Lt. Gen (R) Sikander Afzal

Dr. Manzoor Ahmad

Mr. Munawar Baseer Ahmad

Ms. Roshan Bharucha

Mr. Shakil Durrani

Mr.Abdullah Hussain Haroon

Dr. Iqrar Ahmad Khan

Mr. Tasneem Noorani

Mr. Tariq Parvez

Mr. SalmanAkram Raja

Dr. Atta-ur-Rehman

Dr. Abid Suleri

Mr. Abdullah Yousaf

Mr. Moeed W.Yousaf

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CONTENTS

INTRODUCTION………………………………………………………………………………………………………………………….. 1

SECTION 1: THE SIZE OF PROVINCIAL GOVERNMENTS.……………………………………………………………….. 3

SECTION 2: KEY FINANCIAL RATIOS…………………………………………………………………………………………….. 6

SECTION 3: THE PROVINCIAL BUDGETS OF 2013-14……………………………………………………………………. 7

SECTION 4: FISCAL DEVELOPMENTS IN JULY- MARCH, 2013-14………………………………………………….. 11

SECTION 5: THE BUDGET IMPERATIVES FOR 2014-15 ………………………………………………………………… 14

SECTION 6: THE NEXT NFC AWARD……………………………………………………………………………………………. 15

SECTION 7: RESOURCE MOBILIZATION STRATEGY…………………………………………………………………….. 17

CONCLUSIONS………………………………………………………………………………………………………………………….. 20

STATISTICAL APPENDIX…………………………………………………………………………………………………………….. 21

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List of Tables and Boxes

Table 1: Extent of Fiscal Decentralization ………….……………………………………………………………………………4

Table 2: Share of Provincial Governments in Expenditure on Services…………………………………………….4

Table 3: Relative Size of the Four Provincial Governments………………………………………………………….....6

Table 4: Key Financial Ratios of the Provinces (2012-13)…………………………..…………………………………….7

Table 5: Comparison of the Projected Increases in the Provincial Budgets……………………………………..8

Table 6: Provincial Priorities in Current Expenditure ……………………………………………………………………..9

Table 7: Analysis of Provincial Annual Development Programs (ADPs): 2013-14……………………………10

Table 8: The Combined Provincial Budgetary Trends, July –March, 2013-14………………………………….11

Table 9: Quarterly Cash Balances of the Provincial Goverments……………………………….……………………13

Table 10: Composition of Provincial Tax Revenues……….……………………………………………………………….18

Table S-1: The Budget of Punjab……………………………………………………………………………………………………21

Table S-2: The Budget of Sindh……………………………………………………………………………………………………..21

Table S-3: The Budget of K-PK……………………………………………………………………………………………………….22

Table S-4: The Budget of Balochistan…………………………………………………………………………………………….22

Table S-5: Budgetary Trends in Punjab, July to March, 2013-14.…………………………………………………. 23

Table S-6: Budgetary Trends in Sindh, July to March, 2013-14...…………………………………………………. 23

Table S-7: Budgetary Trends in K-PK, July to March, 2013-14.….……………………………………………….….24

Table S-8: Budgetary Trends in Balochistan, July to March, 2013-14.……………………………………………24

Box 1 : The 7th NFC Award…………………………………………………………………………………………………………….. 2

Box 2 : The 18th Amendment………………………………………………………………………………………………………… 2

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ACRONYMS

ABS Annual Budget Statement

ADP Annual Development Program

AIT Agricultural Income Tax

AJK Azad Jammu and Kashmir

BISP Benazir Income Support Program

BOR Board of Revenue

CCI Council of Common Interests

CCT Conditional Cash Transfers

CPC Civil Procedure Code

FATA Federally Administered Tribal Areas

GARVs Gross Annual Rental Values

GOPu Government of Punjab

HEC Higher Education Commission

ICT Information and Communication Technology

ITO Income Tax Ordinance

MOF Ministry of Finance

MTDF Medium Term Development Framework

MVT Motor Vehicle Tax

NFC National Finance Commission

PRA Punjab Revenue Authority

PRSP Poverty Reduction Strategy Paper

PSDP Public Sector Development Program

PSTS Provincial Sales Tax on Services

SPDC Social Policy and Development Centre

SRB Sindh Revenue Board

UIPT Urban Immoveable Property Tax

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INTRODUCTION

There have been major changes in the allocation of functions and in the fiscal powers of the

Provincial Governments during the last few years. Pakistan has made a great leap forward in

the process of fiscal decentralization during the tenure of the previous Government.

The first step was the 7th NFC Award, which was promulgated by the President of Pakistan

in 2010 for a period of five years. This Award was path breaking in two major ways. First, it

substantially enhanced the share in the divisible pool of the four Provincial Governments.

Second, it introduced multiple criteria, beyond population, in the horizontal sharing of

transfers among the Provinces. (see Box 1)

The second milestone was the unanimous passage in the National Assembly of the 18th

Amendment to the Constitution in 2010. This amendment abolished the Concurrent List of

functions, which, as a consequence, was automatically transferred to the Provinces. A

Federal Legislative List II was introduced. This includes functions which are jointly managed

by the Federation and the Provincial Governments, under the aegis of the Council of

Common Interests. ( see Box 2)

The Provincial budgets for the current financial year, 2013-14, have a special significance.

These are the first budgets presented by the newly inducted Governments, from different

political parties, after the elections of May 2013.

Despite the above developments, the focus in public finances has been perhaps too much

on the Federal Government. Not enough is generally known about the role, size, priorities

and fiscal status of the four Provincial Governments. We try and bridge this gap in

knowledge by presenting, in Section 1, different measures of the size of Provincial

Governments, especially in relation to the Federal Government and in Section 2 the key

fiscal ratios.

Section 3 of the report describes the principal features of the four Provincial budgets of

2013-14. This is followed by an analysis of the budgetary trends in the first nine months, July

to March, of the current fiscal year. Section 5 highlights the budgetary imperatives for the

coming fiscal year, 2014-15. Section 6 indicates the key elements of the resource

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mobilization strategy that could be followed for raising own-revenues. Finally, in Section 6,

we present the conclusions.

Box 1

THE 7th NFC AWARD

Pre- 7th

NFC Award

Under the Distribution of Revenue and Grant-in- Aid Amendment Order 2006: Share of Provinces in Divisible Pool: 2006-07 41.50% 2007-08 42.50% 2008-09 43.75% 2009-10 45.00%

Provincial Shares: Punjab,57.36% ; Sindh, 23.71%; NWFP, 13.82%; Baluchistan, 5.11%

1/6th

of Sales Tax to Provinces, in lieu of Octroi & Zila tax

Grants –in- Aid Shares (Rs.27.5 billion) : Punjab, 11%; Sindh, 21%; NWFP, 35% ; Balochistan , 33%.

7th

NFC Award

1% of Divisible Pool to KPK and Guaranteed Revenues to Balochistan.

Share of Provinces in Divisible Pool: 56% in 2010-11; 57.5% from 2011-12 onwards

Multiple Criteria for Horizontal Sharing: Population, 82%; Poverty or Backwardness, 10.3%; Revenue Collection on Generation, 5.0%; Inverse Population Density, 2.7%

Resulting Shares: Punjab, 51.74%; Sindh, 24.55%,KPK, 14.62%; Balochistan 9.09%

Box 2 THE 18th AMENDMENT

Abolition of Concurrent List and Transfer of most Functions in the List to the Provincial Governments

Significant Transferred Functions: CPC, Drugs and Medicines, Environmental Pollution,

Population Planning and Social Welfare, Labor-Related Functions, Zakat, Tourism

Federal Legislative List II: Railways, Electricity, Ports, National Planning, Census, CCI

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1. THE SIZE OF PROVINCIAL GOVERNMENTS

Different measures of fiscal decentralization are given in Table 1. In terms of revenues

generated, the four Provincial Governments are indeed very small in relation to the Federal

Governments. They account for only 7% of the national tax revenues and for about 9% of

non-tax revenues.

Historically, it has been argued that the low share is a reflection of limited fiscal powers

given to the Provincial Governments. Large and buoyant taxes, like income tax and sales tax,

are in the Federal domain. However, a contrary view that has been put forward is that

Provincial Governments have been reluctant to exercise their fiscal powers because of the

heavy dependence on large transfers from the Federal Government, mandated by various

NFC Awards.

The share in expenditure of Provincial Governments is sizeable. Prior to the NFC Award, the

share of the four Provincial Governments was 28% in overall current expenditure and 40% in

service-related current expenditure. The corresponding share in development expenditure

was 37% in 2009-10.

The big increase in transfers under the 7th NFC Award has led to a quantum jump in the

share in total receipts from less than 40% in 2009-10 to over 51% in 2010-11.Consequently,

provincial share in current expenditure has increased to 28% and in development

expenditure to 45%.Currently, the four Provincial Governments combined account for 30%

of total public expenditure in Pakistan.

The 7th NFC Award and the 18th Amendment have, no doubt, contributed to the process of

fiscal decentralization in the country. However, it needs to be stated that this process has

not yet gone as far as in India. The States in India are responsible for over 40% of the public

expenditure.

Table 2 gives the share of Provincial Governments in social services. Currently, almost 82%

of the expenditure on education is incurred by the Provincial Governments.

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The Federal Government has a major role only in higher education, both general and

technical. Also, the provision of all educational services in Islamabad Capital Territory (ICT)

and in FATA is the responsibility of the Federal Government.

Table 1: EXTENT OF FISCAL DECENTRALIZATION

(%)

2000-01 2009-10 2010-11a 2012-13

Provincial Shares in:

Tax Revenues 4.3 3.7 3.8 6.9

Non-Tax Revenues 14.1 10.9 10.9 8.9

Total Revenues 6.6 5.9 5.6 7.4

Revenue Receipts b 37.5 39.5 51.4 49.7

Current Expenditure 28.3 26 28 29.7

Development Expenditure 28.2 37.4 45 31.2c

Total Expenditure 28.3 28.5 30.6 30.1

a first year after 7th

NFC Award b Net of Revenue Transfers by Federal Government to Provincial Govts. C inclusive of retirement of circular debt

Source: MOF, Fiscal Operations

Table 2: SHARE OF PROVINCIAL GOVERNMENTS IN EXPENDITURE ON SERVICES

EDUCATION (%) Provincial* Federal Total

EDUCATION

2009-10 80 20 100

2012-13 82 18 100

Primary Education

2009-10 96 4 100

2012-13 95 5 100

Secondary Education

2009-10 93 7 100

2012-13 93 7 100

Higher Education

2009-10 43 57 100

2012-13 43 57 100

Technical Higher Education

2009-10 57 43 100

2012-13 52 48 100

Vocational Training

2009-10 99 1 100

2012-13 91 9 100

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In the area of health, the share of Provincial Governments has increased visibly from 76% to

92%, after the 18th Amendment. This is particularly the case in population planning and

preventive measures.

Major investments in energy, water, highways and other physical infrastructure continue to

be executed primarily through the Federal PSDP. But, increasingly the Provincial

Governments are also involved in the development of physical infrastructure.

Turning to the relative size of each Provincial Government, Table 3 indicates that the only

Province with a lower share in combined expenditure than in population is Punjab. While its

population share is over 56%, the share in expenditure is 47%. As such, the per capita

expenditure is the lowest in this Province.

It can be argued that since Punjab is the largest province it enjoys greater economies of

scale in the costs of administration. Also, the latest NFC Award has implied a lower share of

Punjab, following the application of multiple criteria.

HEALTH Provincial Federal Total

HEALTH

2009-10 76 24 100

2012-13 92 8 100

Hospitals & Clinics

2009-10 88 12 100

2012-13 93 7 100

Mother & Child Health

2009-10 99 1 100

2012-13 100 0 100

Preventive Measures

2009-10 21 79 100

2012-13 78 22 100

Population Planning

2009-10 49 51 100

2012-13 98 2 100

WATER SUPPLY & SANITATION

2009-10 99 1 100

2012-13 99 1 100

Source: PRSP Secretariat, MOF

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As opposed to this, Balochistan is not only a relatively backward province, but is also the

Province with the largest geographical area and the smallest population. As such, unit costs

of provision of services are relatively high. All this is adequately reflected in favor of

Balochistan in the 7th NFC Award.

Table 3: RELATIVE SIZE OF THE FOUR PROVINCIAL GOVERNMENTS

Punjab Sindh K-PK Baluchistan Combined

Population Share (%)* 56.2 24.6 13.8 5.4 100

Total Expenditure Share (%) ** 46.6 27.3 16.7 9.4 100

Current Expenditure Share (%) 48.3 27.2 15.7 8.8 100

Development Expenditure Share (%) 41.6 27.5 20 10.9 100

Revenue Transfers (%) 46.9 26.4 16.4 10.3 100

Revenue Receipts (%) 45.4 28.9 15.8 9.9 100

Source: MOF, Fiscal Operations

2. KEY FINANCIAL RATIOS

A comparison is made of the key financial ratios among the four provinces in Table 4.The

higher dependence on federal transfers of the two smaller provinces, Khyber-Pakhtunkhwa

and Baluchistan, is clearly visible. The Province of Sindh has the highest share, 21%, of own-

revenues in total revenue receipts (inclusive of transfers).

The smaller Provinces are able to devote a somewhat larger portion of their budget to

development expenditure; at close to 30%.Punjab has the lowest share of 22% of the ADP in

its budget. In 2012-13, three Provinces Punjab, Sindh and Balochistan enjoyed a cash surplus

at the end of the year. It approached 10% of revenue receipts in the case of Sindh and

Balochistan. This tends to demonstrate limits to absorption capacity. Khyber-Pakhtunkhwa

was the deficit province, with a cash deficit of 2% of revenue receipts, financed by an

overdraft from the SBP.

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3. THE PROVINCIAL BUDGETS OF 2013-14

Table 5 summarizes the projected increases in different fiscal magnitudes by the four

Provincial Governments in their respective budgets of 2013-14.These budgets have been

framed on the key assumption that transfers from the Federal Government will show rapid

growth due to a large expansion in the divisible pool. FBR revenues are expected to grow by

27%.

Own-tax revenues are also expected to be buoyant, largely due to the development of the

Provincial sales tax on services. As opposed to this, non-tax revenues in three Provinces

appear to be on the decline. This is an unfortunate development and implies that levels of

cost recovery are falling.

Overall expenditures are also projected to show big increases, ranging from 17% in

Baluchistan to 45% in Sindh. The latter province appears to launching a big development

effort, with more than doubling of the size of the ADP.

The central feature of the Provincial Budgets for 2013-14 is their expansionary nature.

Given the anticipated big increase in transfers, the newly elected Provincial Governments

Table 4 KEY FINANCIAL RATIOS OF THE PROVINCES (2012-13)

Punjab Sindh K-PK Baluchistan Combined

Federal Transfers as % of Revenue Receipts

85 79.2 94.2 93.8 85.6

Own-Revenues as % of Revenue Receipts

15 20.8 5.8 6.2 14.4

Revenue-Surplus as % of Revenue Receipts

23.6 32.2 28.7 36 28.1

Development Expenditure as % of Total Expenditure

22.4 25.2 29.9 29.1 25.1

Cash Surplus (+)/ Deficit as % of Total Revenue Receipts

1.5 9.3 -1.7 9.7 4.1

Source: MOF,Fiscal Operations

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appear to be intent on implementing ambitious plans for improving the coverage and

quality of services to the people in their domain.

Three of the Four Provincial Governments envisage balanced budgets in 2013-14, with

expenditure, more or less, equal to the revenue receipts. Sindh is the only exception, with a

projected cash deficit of about 2% of budgeted expenditure.

The key budgetary magnitudes for each Provincial Government of 2013-14 are given in the

Statistical Appendix in Table S-1 to S-4.

The provincial priorities in current expenditure are given in Table 6. Transfers to local

governments continue to be made by the Government of Punjab, K-PK, and Sindh. These are

mostly for services like education, health and water supply. It is clear that the share of

overhead costs of administration is the lowest in Punjab.

Table 5

COMPARISON OF THE PROJECTED INCREASES IN THE PROVINCIAL BUDGETS

(%Growth)

Punjab Sindh K-PK Balochistan

General Revenue Receipts 28.5 28.8 34.8 6.6

Revenue Transfers 26.7 27.5 40.8 22.4

Own-Tax Revenues 64 34.2 157.5 ∞

Own-Non-Tax Revenues -16 16.6 -34.6 -75

Development Grants & Loans 10 39.9 2 -90.7

Expenditures 29.9 44.7 32.6 16.6

Current Revenue Expenditures

13.3 17.9 21.4 19.7

Development Expenditure

87.6 124.7 58.8 8.9

Type of Budget *

B D B B

* B = Balanced , D = Deficit , ∞ = very large

Sources : ABS, Provincial Governments Fiscal Operations , MOF

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Table 7 gives sectoral shares in the ADPs of each Provincial Government. The K-PK

Government is attaching more priority to social services; the Punjab and Sindh governments

to irrigation and power. The Balochistan government is focusing more on roads.

Table 6: PROVINCIAL PRIORITIES IN CURRENT EXPENDITURES (Rs. in Billion)

Punjab Sindh KPK

Balochistan

2012-13 R 2013-14 2012-13 R 2013-14 2012-13R 2013-14 2012-13R 2013-14

General Public Service 41.2 40.6 57.8 63.5 35 45.7 24.1 24.2

Inter Government Transfers

222.2 244.3 39.1 39.9 90.8 14 0 0

Public Order and Safety Affairs

91.4 101.1 52.8 54.4 29.9 30.1 15.2 16.2

Economic Affairs 84.2 93.7 43.2 34.4 12.5 17.5 26.1 34.1

Health 58.4 75.7 34.1 36.4 7.6 19.1 9.7 11.2

Education Affairs and Services

37.6 44.6 105.4 120.5 11.2 72.7 23 24.8

Others 14.7 7.6 9.6 6.9 8 11.9 6.5 6.9

Total 549.8 607.6 342.1 356 195 211 104.8 117.3

Share in current expenditures (%)

General Public Service 7.5 6.7 16.9 17.8 17.9 21.7 23 20.6

Inter Government Transfers

40.4 40.2 11.4 11.2 46.6 6.6 0 0

Public Order and Safety Affairs

16.6 16.6 15.4 15.3 15.3 14.3 14.5 13.8

Economic Affairs 15.3 15.4 12.6 9.7 6.4 8.3 24.9 29.1

Health 10.6 12.5 10 10.2 3.9 9.1 9.3 9.5

Education Affairs and Services

6.8 7.3 30.8 33.9 5.8 34.4 22 21.1

Others 2.7 1.3 2.8 1.9 4.1 5.6 6.2 5.9

Total 100 100 100 100 100 100 100 100

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Table 7: Analysis of Provincial Annual Development Programs (ADPs): 2013-14

Punjab Sindh KPK Balochistan

Major Social Services

Education 24.9 16.9 29.8 3.5

Health 17 20.2 10.1 2.6

Water Supply & Sanitation 10.9 4.2 3.6 2.6

Major Economic Services and Infrastructure

Roads 29.2 22.3 15.7 11

Irrigation 22.4 19 3.3 4.4

Power 20.4 11.7 2.2 2.4

Regional/Rural Development 16.1 0.9 17.3 -

Urban Development 13.8 - 5.2 0.4

Agriculture 7.4 10.3 2.7 2.9

Industries 3.2 0.2 4.5 1.1

District ADP 14 20 1.7 -

Special Packages/Initiatives 24.8 22.8 - -

Others 85.9 66.8 21.9 13

TOTAL 290 215.1 118 43.9

Percent Share in Total Allocation

Major Social Services

Education 8.6 7.9 25.3 8

Health 5.9 9.4 8.5 6

Water Supply & Sanitation 3.7 1.9 3 6

Major Economic Services and Infrastructure

Roads 10.1 10.3 13.3 25

Irrigation 7.7 8.8 2.8 10

Power 7 5.4 1.9 5.5

Regional/Rural Development 5.5 0.4 14.7 -

Urban Development 4.8 - 4.4 1

Agriculture 2.5 4.8 2.3 6.5

Industries 1.1 0.1 3.8 2.5

District ADP 4.8 9.3 1.4 -

Special Packages/Initiatives 8.5 10.6 - -

Others 29.6 31.1 18.6 29.5

TOTAL 100 100 100 100

Sources: Annual Development Programs of Provincial governments, 2013-14.

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4. FISCAL DEVELOPMENTS IN JULY-MARCH, 2013-14

The combined provincial budgetary magnitudes are given in Table 8 for the first three

quarters of 2013-14. The fiscal developments are quite contrary to expectations at the start

of the year. The increase in revenue transfers is 14% only, as opposed to a growth of over

27% expected for the year. This primarily reflects the large shortfall in FBR revenues.

Provincial tax revenues have shown fairly rapid growth of over 24%. However, there is wide

variation in fiscal effort among the Provinces. Punjab has shown a high growth rate of 25%,

while the growth in Sindh has been disappointing at 12%. K-PK has doubled its own tax

revenues following the decision to collect directly the sales tax on services rather than rely

on FBR.

The Provincial Governments have done a good job in containing the growth in current

expenditure at 8%, despite the pay increase of 10%.The big surprise is the fall in

development expenditure by the four Provinces combined of 9%. As highlighted earlier,

ambitious plans for development spending were framed at the start of the year. A decline in

the rate of execution is observed in three provinces. The fall is 11% in Punjab, 27% in K-PK

and 47% in Baluchistan. The only Province which has shown some growth in development

expenditure in the first nine months is Sindh of 19%.

Trends in individual Provinces are given in Table S-5 to Table S-8 in the Statistical Appendix.

Table 8 THE COMBINED PROVINCIAL BUDGETARY TRENDS, July to March, 2013-14

(Rs. in Billion)

Budget Estimate (Annual) 2013-14

Actual (July-March)

2013-14

% Share

Actual (July-March)

2012-13

Growth (%)

TOTAL REVENUES 1967.5 1248 63.4 1125.4 10.9

Provincial Share in Fed Revenue 1564.8 1017.8 65 893.1 14

Provincial Taxes 234.6 136.1 58 109.6 24.2

Provincial Non-Taxes 61.1 34.7 56.8 49 -29.2

Federal Loans & Grants 107 59.4 55.5 73.7 -19.4

TOTAL EXPENDITURES 1973.7 1031.1 52.2 986.3 4.5

Current Expenditure 1291.1 831.4 64.4 766.3 8.5

Development Expenditure 681.9 199.7 29.3 220 -9.2

FISCAL BALANCE -6.2 216.9 139.1 55.9

Sources : ABS, Provincial Governments Fiscal Operations , MOF

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The consequence of inadequate spending is the accumulation of large cash surpluses by all

four Provincial Governments. As of 31st of March, 2014, the cash surplus of Punjab was

Rs.63 billion, of Sindh, Rs.59 billion, of K-PK, Rs.53 billion and of Baluchistan, Rs.42 billion.

The combined cash surplus is a massive Rs.217 billion, equivalent to 0.8% of the GDP. This

has been a major factor in containing the consolidated fiscal deficit at 3.1% of the GDP in

the first nine months of the current financial year.

The big question is why the Provincial Governments have failed in expanding their

development spending as per their respective budgets and instead built up large cash

balances? The two Provinces where the same political party has continued after the

elections are Punjab and Sindh respectively. The continuity should have enabled them to

successfully implement their plans. This is to some extent the case with Sindh but not so in

Punjab.

Interviews of officials in Punjab reveal that the primary reason for lack of full spending on

development projects is, first, the over centralization of decisions on expenditure

allocations, Second, the presence of too many block grants has not been backed up by a

potential portfolio of projects in Punjab, in fact, Punjab is the only Province with a full-

fledged Planning and Development Board. This Board ought to have been vested with the

authority to release funds to schemes approved as part of the ADP by the Provincial

Assembly.

The reasons for failure to spend on development projects are probably different in the case

of the two smaller provinces. The new Government in K-PK is probably ‘getting its act

together’. Apparently, the emphasis is on making the process more accountable and

transparent by adhering to proper tendering and contracting procedures. As such, the

capacity to implement projects will build up gradually.

The problems with implementation capacity are more probably serious in Balochistan. This

is compounded further by the difficult law and order situation in the interior of the

Province. The favorable dispensation to the Province in the 7th NFC Award, in an effort to

reduce the development gap, may not be yielding the desired results.

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The accumulation of cash balances, as shown in Table 9, by all Provincial Governments will

lend credence to the views of critics of the 7th NFC Award, who felt that the Award

transferred too high a share of the resources to the Provinces. Negotiations for the 8th NFC

Award start from July 2014. There is no doubt that this weakness of the Provincial

Governments will be highlighted.

Table 9 QUARTERLY CASH BALANCES OF THE PROVINCIAL GOVERNMENTS

(Rs. in Billion)

2012-13 Quarter

2013-14 Quarter

1 2 3 4 1 2 3

Punjab 53.6 66.4 32.4 10.9 47.3 53.9 63

Sindh 37.4 45.5 54.1 41.4 33.1 44 58.6

Khyber-Pakhtunkhwa 1.4 11.9 31.8 -4.2 17.8 32.8 53.6

Balochistan 16.2 18.5 20.9 14.8 23.3 34 41.7

TOTAL 108.6 142.3 139.2 62.9 121.5 164.7 216.9

% of GDP 0.47 0.62 0.61 0.27 0.47 0.63 0.83

Sources : MOF, Fiscal Operations

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5. THE BUDGET IMPERATIVES FOR 2014-15

One of the principal findings from the above analysis is that when there is a fast expansion

in federal transfers to the provincial governments, there is a big increase in the revenue

surpluses of the latter. However, this does not translate fully into correspondingly higher

development spending. Consequently, this leads to the buildup of large cash balances.

While these are good from the viewpoint of containing the size of the consolidated fiscal

deficit, they defeat the intent of the 7th NFC Award and 18th Amendment of greater fiscal

decentralization to achieve rapid expansion in the coverage and quality of basic social and

economic services. It is not surprising that Pakistan's performance on the MDGs remains

tardy.

It is, of course, hoped that the Provincial Governments will strive to raise sharply their

development spending in the last quarter of 2013-14.But according to the SBP, as of 2nd

May, 2014, the combined cash surplus of the four provinces still stands at a high Rs.194

billion, Rs.73 billion less than at the end of March 2014.

Therefore, one of the key budget imperatives for the Provincial Governments is to

implement efficiently and in time the portfolio of on-going development projects. The

procedures for approvals and releases have to be streamlined. The capacity of Project

Managements has to be enhanced.

Two changes, in particular, have to be instituted. First, projects which are at mature stage of

implementation (over 75% completed) must given larger allocations for early completion.

Second, the practice of block grants, without the backup of a portfolio of potential new

projects, must be avoided.

Fortunately, there are potentially two developments which will motivate Provinces to

expand their ADPs and improve rates of implementation. The first relates to the need for

tackling the problem of high levels of power load shedding on a crash program basis.

Hitherto, the Provincial Governments have had only a minor involvement in the power

sector. The government of K-PK is now contemplating allocation of funds for a large number

of small hydel projects. Similarly, the government of Punjab has moved into renewable

energy with projects in solar energy, wind, biomass and biogas. The Government of Sindh

15

has been trying to exploit the resources of Thar coal, without much success up to now.

There is a need that henceforth at least 15% of the Provincial ADPs should be devoted to the

energy sector.

The other emerging imperative on the expenditures side is the development and

management of water resources, especially for agriculture. Increasingly, Pakistan is a "water

-stressed" country and this is beginning to exercise a constraint on agricultural growth.

There are high returns to investments in lining of canals and reducing water losses. Punjab,

for example, has developed an investment plan for Rs 170 billion for improved irrigation.

This must be implemented on a priority basis.

Now that the new Provincial Governments have been in office for over a year, they should

focus on preparing a Medium Term Development Framework (MTDF) for the next four

years, up to the end of their respective tenures. Punjab has recently prepared a MDTF from

2014-15 to 2017-18. This framework envisages raising the provincial ADP from 2.25% of the

GDP in 2014-15 to 3.75% by 2017-18.The largest share in allocations has been given to

energy, irrigation and education and training.

The coming fiscal year, 2014-15, also promises to be a year in which FBR is expected to show

rapid growth in revenues of over 24%, through a package of reforms, including the

withdrawal of large number of SROs. Therefore, there is likelihood that transfers could also

rise relatively fast in 2014-15.The challenge is for the Provincial Governments to

demonstrate that they can absorb efficiently the additional funds.

6. THE NEXT NFC AWARD

Negotiations for the 8th NFC Award will be starting shortly, as 2014-15 is the fifth and last

year of the present Award. This Award, as highlighted in the beginning of the report, was

unprecedented and radical in character. As such, it is unlikely that big changes will be made

in the next Award, especially in light of the following clause (3(A) of Article 16) added by the

18th Amendment:

"The share of the Provinces in each Award of National Finance Commission shall not be

less than the share given to the Provinces in the previous Award."

16

Therefore, the floor to the combined share of the four Provinces in the net Divisible Pool of

Taxes is 57.5%, as per the present Award. Given the presence of large cash surpluses, it is

unlikely that the Provinces will be able to argue for an increase in share.

Instead, the Federal Government 1 may ask for the full assumption of expenditure

responsibilities by the Provincial Governments of functions transferred to the latter under

the 18th Amendment. These had been temporarily taken on by the Federal Government

under a CCT decision, and include the following:

i) Development expenditure on projects related to health and population welfare,

referred to as 'vertical programs', outside Islamabad Capital Territory, AJK and

FATA. These are currently being executed by the Federal Health Services,

Regulations and Co-ordination Division. The portfolio consists of 13

projects/programs. The total cost is Rs.122 billion out of which an expenditure of

Rs 31 billion has already been incurred. Therefore, the throw -forward is Rs 91

billion. The annual allocation for these projects/programs in the Federal PSDP of

2013-14 is Rs 26 billion, with a rupee component of 94%.

ii) Most of the management functions of higher education have been transferred to

the Provincial Governments under the 18th Amendment, excluding the following:

a) Education in respect of Pakistani studies in foreign countries and foreign

students in Pakistan.

b) Federal agencies and institutes for the following purpose, that is, for

research, for professional and technical training, or for the promotion of

special studies.

The HEC Act is currently operating under the Federal HEC Ordinance of 2002.The Supreme

Court has ruled that no change can be made until this law is amended.

Once the legal issues are resolved, the Federal Government may legitimately argue that

allocations for higher education should also be made from provincial budgets. Currently, the

budget of HEC is over Rs.50 billion, with 36% as the development allocation.

1 following a review of the implementation of the 18

th Amendment by the Parliamentary Committee headed by

Senator Raza Rabbani.

17

iii) Some projects/programs in the Divisions of Education and Training and National

Food Security and Research could also be transferred to the Provincial

Governments.

iv) The function of ' Social Welfare' was in the Concurrent list. As such, following the

18th Amendment, it stands transferred to the Provincial Governments. Therefore,

it may be argued that the Benazir Income Support Program (BISP) should also be

provincialized. The proposed allocation to BISP in 2013-14 by the Federal

Government is Rs 75 billion.

Overall, there is the possibility that if the 18th Amendment is fully implemented in letter and

spirit, then the expenditure liabilities of the four Provincial Governments could increase by

Rs 125 to Rs 150 billion. This will take up most of the fiscal space currently available in the

form of cash surpluses.

In the event that there is the above mentioned transfer of functions and the associated

expenditure obligations, without any change in the share in the Divisible Pool, then the

Provincial Governments will have to pursue an aggressive policy of resource mobilization.

This will become necessary if the coverage and quality of services at the sub-national level is

to be augmented.

7. RESOURCE MOBILIZATION STRATEGY

The tax-to-GDP ratio of the four Provincial Governments combined is 0.7%. It has risen in

recent years following the transfer of the sales tax on services. Both Sindh and Punjab have

created specialized tax agencies (SRB and PRA) to collect this tax.

Today, there are a dozen sources of tax revenue at the Provincial level. But only five, viz, the

provincial sales tax on services (PSTS), stamp duty, motor vehicle tax (MVT), urban

immoveable property tax (UIPT) and land revenue, account for over 90% of the tax revenues

(see Table 10). The only major direct tax is the Agricultural Income Tax (AIT). This tax has

languished due to low rates and lack of enforcement. Nationally, it yields less than Rs.1

billion.

18

The resource mobilization strategy of the Provincial Governments ought to be to

concentrate on taxes which have large tax bases and potentially progressive incidence.

Three taxes strongly satisfy these criteria, namely the agricultural income tax, urban

immoveable property tax and the provincial sales tax on services.

Proposals for development of these taxes are presented below.

Agricultural Income Tax

In view of the low collection efficiency of the Provincial Boards’ of Revenue (BOR) in this tax,

it is proposed that the presumptive nature of this tax be retained. However, the fixed tax

per acre was set in 1997 when the AIT was promulgated. This should be indexed to the

inflation in agricultural prices since then. The resulting new rates are given below (for

Punjab):

Table 10 :COMPOSITION OF PROVINCIAL TAX REVENUES (Rs in Billion)

2000-01 2012-13 ACGR (%)

Collection Share (%)

Collection Share (%)

Property Tax 4.7 24.9 5.8 3.8 1.8

AIT 1.2 6.3 0.9 0.6 -2.4

Stamp Duties 5.1 27 18.3 12.1 11.2

MVT 3.1 16.4 14 9.3 13.3

Others 4.8 25.4 106.8a 70.9 ∞

TOTALa 18.9 100 150.7 100 a Mostly sales tax on services , ∞ = very large

Sources: MOF, fiscal operations

Old Rate (per acre)

New Rate * (per acre)

(Rs)

Not exceeding 12.5 acres --- ---

Exceeding 12.5 acres but not exceeding 25 acres 150 750

Exceeding 25 acres 250 1250

* rise in prices of approximately five times

19

Even after the escalation in fixed rates, the incidence of the AIT will be only 2.5% of the

estimated average net income per irrigated acre. In addition, the compliance rate is very

low. This may be improved by enhancing the penalty from a maximum of Rs.1000 only to

100% of the tax not paid.

Urban Immoveable Property Tax

This tax today yields only Rs.7 billion for the four provinces combined. The effective burden

is only about 3-4% of the tax base, as compared to the statutory rate of 20%. The gap needs

to be reduced by implementing the following:

i) Extension of the rating areas to include residential and industrial development at the

periphery of metropolitan cities.

ii) Survey of properties and updating of the Gross Annual Rental Values (GARVs).

iii) Reduction in the tax differential between owner-occupied and rental properties.

iv) Following the survey, a move towards a self-assessment regime and reduction in the

statutory rate.

Provincial Sales Tax on Services

This tax has rapidly emerged as the largest tax at the Provincial level. The combined

collection by SRB and PRA, in Sindh and Punjab respectively, has reached Rs.70 billion by

2012-13. This is equivalent to 48% of the combined total tax collection in the two provinces.

A number of proposals are put forward below for further development of the Provincial sales

tax on services, as follows:

i) The law provides for the "reverse charge mechanism", according to which the tax

can be levied also on the recipients of services. This implies that the tax can be

charged on the import of services, including communications, construction services,

financial services, IT services, royalties and license fees and other business services.

A conservative estimate of the additional revenue yield is Rs 40 billion.

ii) Remove exemptions on technical, software and engineering consultants; travel

agents , cars/automobile dealers (via Companies) , cable TV operators.

20

iii) Introduce Withholding Tax (similar to those in the ITO) on the following: technical

fees, services, contracts and commissions at 4%.

iv) Levy a presumptive tax on hard-to-tax services

The target should be to raise the Provincial Tax-to GDP ratio by 1% in three years.

CONCLUSIONS

In the first year after elections, the Provincial Governments have framed ambitious budgets.

Based on anticipated big increases in transfers from the Federal Government, the size of the

ADPs for 2013-14 have been raised sharply.

Nine months into the year, the results are disappointing. Actual development expenditure

has shown little growth and even declined in some cases. Instead, large cash balances have

been built up. The issue is whether these surpluses are temporary or structural in nature,

highlighting limits to absorption capacity.

There is need for urgent review of implementation of the transfer of functions under 18th

Amendment by the Parliamentary Committee headed by Senator Raza Rabbani. Parallel to

the impending discussions on the 8th NFC Award, consideration may be given to transfer of

expenditure liabilities associated with vertical programs, higher education and social welfare

to the Provinces. This will take up the fiscal space demonstrated by the accumulation of

large cash surpluses.

Thereafter, the Provincial Governments may be more motivated to develop their own

sources of revenue. The most promising sources are the sales tax on services, agricultural

income tax and the urban immoveable property tax. These taxes have significant revenue

potential and progressive incidence. Detailed taxation proposals in these taxes are

presented in the report.

21

STATISTICAL APPENDIX

Table S-2 THE BUDGET OF SINDH

(Rs in Billion)

Revised Estimates 2012-13

Budget Estimates 2013-14

Growth Rate (%)

General Revenue Receipts 445.6 574.1 28.8

Revenue Transfers 320.7 409 27.5

Own-Tax Revenues 68.1 91.4 34.2

Own-Non-Tax Revenues 24.7 28.8 16.6

Development Grants & Loans 32.1 44.9 39.9

Expenditures 404.2 585.1 44.7

Current Revenue Expenditures 301.9 356 17.9

Development Expenditures 102.3 229.9 124.7

Fiscal Balance 41.4 -11

Table S-1 THE BUDGET OF PUNJAB

(Rs in Billion)



Growth Rate (%)


Revenue Transfers 569.3 721.6 26.7

Own-Tax Revenues 77.3 126.8 64

Own-Non-Tax Revenues 28.1 23.6 -16

Development Grants & Loans * 27 29.7 10


Current Revenue Exp 536.3 607.6 13.3

Development Exp 154.6 290 87.6

Fiscal Balance 10.8 4.1 -62

Sources : Fiscal Operations, MOF, ABS, GOPu

22

Table S-3 THE BUDGET OF K-PK

(Rs in Billion)



Growth Rate (%)



Own-Tax Revenues 4 10.3 157.5

Own-Non-Tax Revenues 10.1 6.6 -34.6

Development Grants & Loans 30.1 30.7 2

Expenditures 248.1 329 32.6

Current Revenue Expenditures 173.8 211 21.4

Development Expenditures 74.3 118 58.8

Fiscal Balance -4.3 -0.3

Table S-4 THE BUDGET OF BALOCHISTAN

(Rs in Billion)



Growth Rate (%)

General Revenue Receipts 153 163.1 6.6


Own-Tax Revenues 1.1 6.1 ∞

Own-Non-Tax Revenues 8.4 2.1 -75

Development Grants & Loans 18.3 1.7 -90.7


Current Revenue Expenditures 98 117.3 19.7

Development Expenditures 40.3 43.9 8.9

Fiscal Balance 14.7 1.9

23

Table S-5 BUDGETARY TRENDS IN PUNJAB, July to March, 2013-14

(Rs in Billion)


Actual (July-March)

2013-14

% Actual (July-

March) 2012-13

Growth Rate

General Revenue Receipts 872 545.5 62.6 494.7 10.3

Development Loans & Grants 29.5 4.1 13.9 11.4 -64

TOTAL RESOURCES 867.6 549.6 63.3 506.1 8.6

Current Revenue Expenditure 607.6 397.8 65.4 374.2 6.3

Development Expenditure 290 88.8 30.6 99.6 -10.8


FISCAL BALANCE -30 63 32.3 95

Sources : ABS, GOPu Fiscal Operations , MOF

Table S-6 BUDGETARY TRENDS IN SINDH, July-March,2013-14

(Rs in Billion)

Budget Estimate

(Annual) 2013-14

Actual (July-March)

2013-14 %

Actual (July-March)

2012-13 Growth Rate

General Revenue Receipts 529.2 340.3 64.3 303.1 12.2

Development Loans & Grants 44.9 17.7 39.4 23.1 -23.4

TOTAL RESOURCES 574.1 358.1 62.4 326.2 9.8

Current Expenditure 356 228.8 64.3 212.9 7.5

Development Expenditure 229.9 70.7 30.8 59.2 19.4


FISCAL BALANCE -11.8 58.6 54.1 8.3

24

Table S-8 BUDGETARY TRENDS IN BALOCHISTAN, July to March,2013-14

(Rs in Billion)


Actual (July-March)

2013-14 %

Actual (July-March)

2012-13

Growth Rate

General Revenue Receipts 161.4 113.4 70.2 98.7 14.9

Development Loans & Grants 8.9 14.6 164.01 13.1 11.5

TOTAL RESOURCES 170.2 128 75.2 111.8 14.5

Current Revenue Expenditure 117.3 74.8 63.8 69.1 8.2

Development Expenditure 43.9 11.5 26.2 21.7 -47

TOTAL EXPENDITURES 161.3 86.3 53.5 90.9 -5

FISCAL BALANCE 8.9 41.7 14.9 179.8

Sources : Fiscal Operations , MOF

Table S-7 BUDGETARY TRENDS IN K-PK, July-March,2013-14

(Rs in Billion)


Actual (July-March)

2013-14

% Actual (July-March)

2012-13

Growth Rate

General Revenue Receipts 298 189.3 63.5 155.3 21.9

Development Loans & Grants 15.9 23 144.6 26 -11.5

TOTAL RESOURCES 313.9 212.3 67.6 181.3 17.1

Current Expenditure 211 130 61.6 110.1 18.1

Development Expenditure 118 28.7 24.3 39.3 -27

TOTAL EXPENDITURES 329 158.7 48.2 149.5 6.2

FISCAL BALANCE -15.1 53.6 31.8 68.6

Sources : Fiscal Operations , MOF

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Institute for Policy Reforms

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