The Punjab Cabinet in its meeting with Chief Minister Shehbaz Sharif in the chair yesterday, approved the design of Interim Provincial Finance Commission Award, 2016.
i. The share of ‘Allocable Amount’ for local government functions will increase to 44% of Net Provincial Consolidated Fund (NPCF) resulting in 42% increase in resources available for local service delivery functions.
ii. The resources flowing to local governments would comprise two components, i.e. formula-based component (37.5% of NPFC) and Grants for Special Purposes (6.5% of NPCF).
iii. Rs391.0 billion are earmarked for local government functions with ‘formula based transfers’ amounting to Rs337.5 billion. The formula based transfers is 23.1% higher than current year’s budget allocation (based on PFC 2006) of Rs274.0 billion. Grants for Special Purposesamounting to Rs54.0 billion have been added to help augment service delivery bylocal governments.Overall the award would result in unprecedented transfers to local governments, which will fiscally empower this essential tier of government. It needs to be clarified that higher transfers are being made to local governments despite theprovincialization of many functions including agriculture, livestock, roads and buildings, etc.
iv. Interim PFC Award, through formula based transfer system, will bring transparency and predictability into fiscal transfer system and enable local councils/governments to plan sustainably.
v. Interim PFC-2016 proposes establishing three types of grants – General Purpose Grant (82%), Transition Grant (7%) and DevelopmentGrant (11%). Size of each grant and shares of local governments in each grant are determined on the basis their historical expenditure and fiscal need. Development Grant will not be used for other than developmental purposes.
vi. Shares of local governments are: District Education Authorities (66.9%), District Health Authorities (16.3%), Local Councils (12.8%) and Union Councils (4%) ensuring adequate resources for salary and non-salary purposes as well as development needs.
vii. Interim PFC Award proposes an overall increase of 164% for local councils (District Councils and Municipal Corporations/Committees) translating into increase from Rs17.0 billion to Rs43.2 billion.
viii. The function of health at district level (through District Health Authorities) would get an increase of 37% over their estimated expenditure for on-going financial year from Rs40.2 billion to Rs55.1 billion.
ix. The function of primary and secondary education at district level (through District Education Authorities) would also get an increase of 19% (Rs37.5 billion) over its estimated expenditure during FY 2016/17. The transfers would increase from Rs190.4 billion to Rs226.0 billion.
x. Horizontal distribution of ‘General Purpose Grant’ and ‘Development Grant’ would be done on the basis of a multi-factor formula, with weight of ‘population’ determined to be75% (which was 91% under the PFC Award 2006). The remaining weight i.e. 25% is distributed between poverty, expenditure needs and cost of service delivery.
xi. The factors considered for horizontal distribution among DEAs, in addition to population, are population density, poverty, school going-age population, girls middle school enrolment and out of school children.
xii. In case of DHAs, population density, poverty, women population of child bearing age and population of elderly (above 65% years) & children (less than 9 years) in addition to population.
xiii. In case of local councils, the factors considered in horizontal distribution are population density, poverty and lack of access to improved water sources in addition to population.
xiv. Horizontal distribution on the basis of variables determining fiscal need and cost of service delivery would ensure that each local government would have sufficient resources for salary, non-salary and development purposes.
xv. Each urban and rural union councils will receive an annual transfer of Rs3.6 million.
xvi. In order to incentivise performance and to build capacity of local governments, the Award also proposes to establish a competitive challenge fund for capacity building and innovation in service delivery.
xvii. Government is establishing an Internal Audit Authority for annual and special financial and performance audits of local government through independent / third party in order to reduce fiduciary risks in utilization of funds and to get value for money of its investments.
During the discussion on the Award, the Chief Minister said that it was a historic award which would go a long way towards improving service delivery by local governments in Punjab. He said that his Government wanted to empower local governments in Punjab. Devolution of 44 per cent of Net Provincial Consolidated Fund to local governments is a proof of the resolve of the Government to ensure devolution of financial authority to local governments. Chief Minister also said that share of local governments works out to Rs391.0 billion for FY 2016-17. He also added that the development grants given to local governments would be utilized only for the purpose of development expenditure.
Dr Aisha said vertical share of local governments has been decided to ensure adequacy of resources for local governments. It will help enable local governments perform their function at the local level.
The share of local governments in the provincial revenue has been increased despite provincialization of a number of functions. She said that a multi-factor formula has been used for horizontal distribution of resources under the Award. The weight of ‘population’ in the formula has been kept at 75% (which was 91% under the PFC Award 2006).
The remaining weight ie 25% is distributed between poverty, expenditure needs and cost of service delivery. Inclusion of indicators of poverty, expenditure needs and cost of service delivery will help equalize between different districts of Punjab by increasing the share of districts of South Punjab.
As a consequence the southern districts of Punjab will have more resources at their disposal to improve the state of education, health and municipal services in the region.
At the same time, through transfer of a higher vertical share, the needs of people of remaining districts of Punjab have also been taken care of. She added that special attention has also been given to ensure provision of adequate resources to rural areas of Punjab. In order to achieve this objective, adequate share would be transferred to District Councils.
In addition, equal monthly transfers would be provided to urban and rural union councils which will help resolve day to day issues faced by citizens at the grass root. Most importantly the Award would be formula based. It would bring transparency and predictability in transfers to local governments in Punjab.
Citation: Staff Reporter. Interim Provincial Finance Commission Award okayed. The Nation, December 31, 2016.