MUNICIPAL PUBLIC FINANCE IN WAKE OF RECENT DEVELOLUTION

REFORMS IN PAKISTAN Mansoor Ali Masood

Deputy DirectorMinistry of Finance

Government of Pakistan9/11/2018

Urbanization in Pakistan

AREAPopulation (Million) Urban Share (%)

1981 1998 2017 1981 1998 2017

Pakistan 84.25 131.35 207.77 28.30 32.52 36.38

KP 11.06 17.74 30.52 15.06 16.87 18.77

FATA 2.20 3.18 5.00 - 2.69 2.84

Punjab 47.29 73.62 110.01 27.60 31.27 36.71

Sindh 19.03 30.44 47.89 43.32 48.75 52.02

Baluchistan 4.33 6.57 12.34 15.62 23.89 27.55

Islamabad 0.34 0.81 2.00 60.06 65.72 50.58

Source: Pakistan Bureau of Statistics

Urbanization in Pakistan (1990-2030)

Expansion of Cities

Brief overview of Municipal Public Finance in Pakistan

Brief History of Devolution in Pakistan

• Devolution reforms implemented in Pakistan fromtime to time mainly under the military ledgovernments. However, they didn’t remain verysuccessful

• Local governments have traditionally been managedby bureaucracy

• After 18th constitutional amendment, politicalgovernments started a fresh process ofdecentralization

Local Government Structure

• Urban Areas– Metropolitan corporations (for big cities like

Karachi/Lahore/Peshawar/Quetta)– Municipal Corporations– Municipal Committees

• Rural Areas– District Councils– Union Councils

Functions of local governments

• Planning and development and maintenance of roads, bridges, street lights and storm water drains

• Providing protection against stray animals and animal trespass, and establishing cattle pounds

• Public Health (Hospitals, Rural Health Centres, Basic Health Units, Family Welfare Clinics, Promotion of public health, responsibility for sanitations, removal, collection and disposal of Refuse, infection diseases, registration of birth, deaths and marriages)

Functions of local governments

• Water supply and drainage • Fire fighting service • Civil Defence • Slaughter House • Streets (Permission of laying out street and proper

lightening of streets, Traffic Planning, Street Watering) • Education (Adult / Primary) • Trees, Parks, Gardens and Forests • Culture (fairs and shows etc, Libraries, museum,

exhibitions etc)

Sources of Municipal Finance• Tax on the annual value of buildings and lands• Tax on transfer of immovable property• Fee for registration and certificates of birth anddeath, marriages and divorce

• Advertisements including bill board and hoarding• Cinemas, dramatic and theatrical shows etc• Vehicles (other than motor vehicle but includingcarts bi- cycles and all kinds of boats

• Tolls on roads, bridges and ferries• Rate for the supply of water• Schools fees in respect of schools established ormaintained by the Local Govt

Sources of Municipal Finance

• Fees for fairs, agricultural shows, industrial exhibition, tournaments and other public gatherings

• Fees for markets • Fees for licenses, sanctions and permits granted by the

Local Govt)• Fees for slaughtering of Animals • Parking Fee • Fisheries • Any other tax which is levied by Government • Grants by Provincial / Federal Govt, if any

Recent Local Government Reforms and Lessons Learnt

Local Government Reforms (post 2013)

• All 4 provinces of the country passed local government bills from 2013-2017

• Public Finance Commissions (PFCs) constituted for distribution of resources among districts/ municipalities on the basis of:– Population– Poverty incidence– Infrastructure and financing needs

• Local funds and municipal/district grants committees established

Formula(s) for distribution of funds in 4 provinces of Pakistan

• Punjab• Population: 75%• Poverty: 25%

• Provincial retained amount: 62.5%• Provincial allocable Amount: 37.5%

• Khyber Pakhtunkhwa• Population: 50%• Poverty: 25%• Lag in infrastructure: 20%• Revenue base: 5%

• Provincial retained amount: 40%• Provincial allocable Amount: 60%

• Sindh• No PFC award or multi-factor

formula for distribution of funds announced till date

• Funds transferred directly to the respective administrative departments to implement their schemes

• Baluchistan• No PFC award or multi-factor

formula for distribution of funds announced till date

• Funds transferred directly to local councils

Source: “Budget Making Process and Development Project Implementation at District Level in Pakistan”, 2018, Centre for Peace and Development Initiatives

Source: “Budget Making Process and Development Project Implementation at District Level in Pakistan”, 2018, Centre for Peace and Development Initiatives

Source: “Budget Making Process and Development Project Implementation at District Level in Pakistan”, 2018, Centre for Peace and Development Initiatives

Autonomy of municipal budget • Scope and scale of autonomy varies from province to

province– KP government devolved power beyond the

district, tehsil, and union council levels of local government to the even lower tier of village and neighbourhood councils.

– KP government resolved to allocate more than 30 percent of its provincial budget to local governments in FY2016-17.

– In Sindh and Punjab, the local government laws are more centrist, and relations between the local and provincial governments are explicitly asymmetrical

Autonomy of municipal budget

– Both Punjab and Sindh have done away with the midlevel tier of local government (the tehsil), and have not created any further local government structures beyond the union council level – In Baluchistan, limited autonomy has been

given to local governments • Despite these variations, local governments in all

provinces are currently struggling, to varying degrees, to secure adequate political, fiscal, and administrative power needed to fulfil their functions.

Gaps in current local government systems

• Capacity and Revenue Generation Issues• Current local government system has yet to become

fully functional• Delays in obtaining rules and regulations from the

provincial government concerning accounting,zoning, and other essential responsibilities of local government

• Local resource mobilization has not received adequate attention in the latest devolution effort

• Several local sources of revenue generation for local governments, such as the octroi tax, are no longer available

Gaps in current local government systems

• No significant provincial sources of revenue, such as excise or taxation, have been effectively devolved under the new system

• Political bias and favoritism—respective provincial finance ministers and assemblies arbitrarily decide what funds were to be given to them each year to local governments

• Patronage politics—members of the provincial assemblies (MPAs) have at their disposal more powers and sizable discretionary funds

• Bureaucrats resent being made subordinate to a locally elected official (the district nazim/mayor)

• Lack of coordination between departments

Municipal Public Finance Reforms in recent past

• Punjab Cities Governance Improvement Program– Streamlining different financial streams of five largest cities, and

improving transparency in their operations– Developed and implemented environmental and social

framework– Urban immovable property tax system has been upgraded

through digitization of land records resulting in enormous increase in financial resources of the municipalities.

– Resource efficiency has been brought in, with theintroduction of new technologies for different municipal functions and services.

– Creation of 56 corporate companies under government for provision of transport, clean drinking water, healthcare, waste management, parking, livestock management, Municipal Development etc.

Municipal Public Finance Reforms in recent past

• Sindh Cities Improvement Initiative Program (SCIP)– ADB assisted, US$ 400 million infrastructure and

service delivery reform program which aims to improve water supply, wastewater management, and solid waste management (SWM) services in participating 20 secondary cities through establishment of government-owned, professionally managed Urban Services Corporations; urban sector reforms and investment in water supply, wastewater and solid waste management infrastructure

Municipal Public Finance Reforms in recent past

• Municipal Service Delivery Program (MSDP)– USAID funded (US$ 66 million), for development of

municipal infrastructure in smaller towns, falling outside the purview of SCIP.

– “Municipal Finance Assessment Study” is being carried out to assess municipal finance system and explore revenue generating avenues for municipalities, aimed at making them financially self-reliant

Major challenges in the coming years

• Provincial governments reluctant to share authority with local governments

• Heavy dependence on revenues / grants and inadequate capacity to generate own funds

• Local government inability to fix taxes and enforce them• City government taxes are very political• Idea of free benefits among local population is a serious

issue• Lack of adequate powers to generate funding• Lack of involvement of local communities from planning

to implementation and monitoring

Potential Municipal Finance Reforms

Increasing Local Government Revenue through reforms

• Review, revoke or re-negotiate the terms of short-term lease to bring in conformity with market prices

• Long-term leases after its expiry may also be repossessed or re-negotiated as per the market price and with the built in clause on incremental increase with the passage of time.

• Such reforms have worked in Tanzania where the Local Government Reforms contributed to positive changes in Local Authorities’ provision of basic services to the public, enhanced capacity for financial management and revenue enhancement, improved governance including accountability and responsiveness of local government

Accessing Domestic Capital Market

• The devolution plan in Pakistan pre-empts local governments from raising funds in the capital markets. Municipal bonds are unheard of in Pakistan.

• There is an immediate need of financial restructuring in Pakistan so that local governments can expand revenue base by relying on direct taxation rather than on transfer of payments.

• In addition, large municipalities, which have high-value assets, should be permitted to float bonds and debentures in open markets to finance development.

Community Led Municipal Services Financing Facility

• Pakistan Poverty Alleviation Fund is an example of

Municipal Services Financing Facility that implements

its schemes through the NGOs by following

community based organizations (CBO) led approach.

• Projects like Orangi Pilot Project have raised self-

finances for providing municipal services from

CBOs own savings.

Conclusion• Provincial governments will need to ensure that local

governments have sufficient resources and authority to address the development challenges in local communities.

• Provincial governments should recalibrate their approach towards this third tier of the government.

• The LG Acts will need to evolve over time and the provincial-LG relations must attain a new balance of power.

• The federal government would need to explore supporting inter-provincial coordination and experience sharing to define guiding principles for LG reforms.

Thank You