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Blessings and curses of urbanisation

With fast-paced unplanned urbanisation in most of the developing countries, the cities have become overcrowded with massive environmental degradation and lack of basic necessities. Pakistan is not an exception. Experts have a broader consensus that urbanisation is a natural phenomenon and is part of economic transformation. The blessings and curses of urbanisation are concomitant.

Improved sanitation facilities are available to 47 per cent of population while 23 per cent of the population still goes for open defecation. What were once Layari and Malir rivers have now turned into effluent disposal channels.

This grave situation of human development indicators and environmental degradation certainly draws attention towards the role of public policy and its evident failure in Pakistan.

The provision of urban necessities to growing population is one of the big challenges for financial sustainability of public sector, specifically when it comes to determining the right mixture of financing urban development projects, which is mainly constrained due to development incompatible with federalism, structural impediments to public resource mobilisation and poor institutions and governance.

Most of the water and sanitation projects, mass transit systems are largely subsidised and a very few of them generate ample revenues to cover operating costs.

The federal government has a major pie in consolidated tax collection, as compared to provincial and local governments with limited tax base. The provincial resource base comprised of share in divisible pool, royalty, development and non-development grants by federal government and their own source revenues. Similarly, resource base for local tier is grants from the federal and provincial governments and their own source revenues. Instead of complimenting federal transfers with provincial and local taxation, the sub-national governments tend to substitute federal transfers with their own tax effort. Therefore, with low fiscal space the sub-national governments are persistently looking for alternative financing whether from international development institutions, loans, partnership with private sector and NGOs.

The fiscal capacity of local tier is more constrained in terms of resource mobilisation and their present legislative structure. The 2001 local governments design supports abundantly empowered local governments with dormant provincial jurisdiction and the 2013 local governments design which came after the 18th amendment offers limited powers to local governments and the situation has become more intricate with provincial encroachment over local government functions.

The provincial governments of Punjab and Sindh have enacted and created health, education, mass transit, building control authorities leaving local tiers virtually redundant. Sindh’s case is more complicated in terms of two different systems for urban and rural local governments. Evolution of such federalism structure is inherently incompatible to decentralised urban development agenda.

Federal transfers to Punjab and Sindh for 2016-17 amount to 61.8 and 64.2 per cent with provision of project foreign assistance of 6.8 and 3.4 per cent of total budget respectively and the situation in KPK and Balochistan is even more disappointing. The provincial own source revenues add up to roughly 30 per cent of budget primarily due to untapped provincial tax base and substitution of federal transfers over own tax effort. For example, the average agriculture income tax per cultivable acre in Punjab and Sindh amount to Rs85 and Rs77 only respectively. Land revenue accounts for around 1.39 per cent of provincial revenue receipts in Punjab and for other provinces it is even less than 0.5 per cent.

As of today significant proportion of provincial revenues are coming from indirect taxes, GST on services, property taxes, stamp duties, motor vehicle tax and registration fee etc.

Likewise, the local governments are financially dependent on provincial and federal tiers. 77.6 per cent of Karachi Municipal Corporation’s revenues are in form of provincial grants. The revised estimates of Karachi Water and Sewerage Board’s budget 2015-16 show that the department’s own receipts are 21.1 per cent and 78.9 per cent revenues are transfers and grants from upper tiers.

With Karachi Building Control Authority (KBCA) reengineered to Sindh Building Control Authority (SBCA), Sindh Waste Management Board, Sindh Transport and Mass Transit Department, Provincial Local Government, Rural Development and HTP Department, the local government’s jurisdiction will be restricted to manage zoo, museum, street lights, parking fee, plantation, registration of birth, marriages and deaths. These are self-evident contradictions to the spirit of Article 140-A of the Constitution.

Given this very context, there is increasing focus of sub-national governments to search for alternative modes of financing urban needs. Let’s have a look at few relevant examples from international experience.

Izmit Yuvacik Dam in Turkey is the world largest private sector participation for water infrastructure investment. In China, the municipal governments have legitimate powers of extra budgetary revenues in addition to their shared revenues to finance urban infrastructure. Charges and fee, Urban Maintenance and Construction Tax are prominent examples of such revenues.

To finance water and sewerage infrastructure, Ahmadabad Municipal Corporation in 1997 raised municipal bonds backed by state guarantee with national government subsidy for tax incentives to cut down the interest cost. In USA, there are two prominent forms of urban development financing — US bonds and internal revenues. Number of other financing options are available like bank loans, commercial paper, variable rate demand notes, bond anticipated notes, tender option bonds and municipal insurance bonds.

Every alternative financing option is likely to raise the debt liability and subsidies burden to exchequer. Most of the water and sanitation projects, mass transit systems are largely subsidised and a very few of them generate ample revenues to cover operating costs. Financing measures substantially other than own revenue mobilisation will not only jeopardise fiscal sustainability but also be an incentive to continue with development incompatible with federalism leaving limited space for public sector reforms.

So, about the urban development agenda, the government has to go for restrained indifference with thorough privatisation, public private partnership or broadening its own resource base. Whatever the option may be, certainly fiscal sustainability will come through financial independence and fair taxation across the board.

Khan, Asim. Blessings and curses of urbanisation. The News on Sunday, October 1, 2017.

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