1

Decentralization Initiatives in Pakistan Sharing of Experience

Presentation for

Asia-Pacific and Latin-America Interregional Forum on Managing for Results Decentralization and the Changing Role of

Central Finance Agencies

Manila, PhilippinesNovember 28-29, 2012

Sequence of Presentation

Decentralization – Pakistan Context

Devolution of Political Power

Devolution of Economic Power

Decentralization to Line Ministries

Delegated Structure of PFM

Medium-Term Budgetary Framework

Output Based Budgeting

Looking Forward

Decentralization – Pakistan Context

Transferring decision-making governance closer to the

people - Devolution of Political Power

Transferring decision-making governance closer to the people - Devolution of Economic Power

Decentralization of operations to line ministries to ensure effective

implementation of government policies

Delegation of Power to Lower Levels of Administration

Devolution of Political Power

Devolution in Pakistan – 2000

There are three tiers of the government in Pakistan: Federal – Provincial - Local governments

Under Devolution of Power Plan, LGs at district and sub-districts levels

Each LG had its mayor and deputy mayor, elected council and administration

The System was objected by the provinces having been bypassed   The Initiative was blamed serving to strengthen military's power in

local politics at the cost of democratic forces

The System could not take roots due to said controversies

Devolution of Political Power

Devolution in Pakistan – 2000 Recommendations forwarded to improve the System

Consensus by the Political Forces

Political Acceptance by the provincial governments

Local government elections on party basis

Refraining from imposing political discipline on local officials and misusing them for political ends

Greater control over budgetary resources

Devolution of Political Power

18th Amendments - April 2010

Strengthen Federalism: Empowerment of Provinces

Concurrent List abolished where FG had overriding authority Concurrent List : provinces had semblance of ownership, FG

“leadership”Federal List 67 and Concurrent List 47 subjects before the

18th Amendment18 Ministries were devolved to ProvincesCouncil of Common Interests strengthened & domain

expanded from 8 to 18 Subjects

Devolution of Economic Power

The Constitution provides a mechanism for transfer of resources from the divisible pool to the provinces – through ‘National Finance Commission’ (NFC)

The Local Government Ordinance of 2001 requires provinces to have ‘Provincial Finance Commission’ (PFC) to distribute resources from divisible pool to local governments

Devolution of Economic Power

7th NFC Award -2010 Provincial share in the divisible pool enhanced from 45% in 2009-10

to 57.5% in 2011-12 Moved away from population as the sole basis for distribution of

resources– Population: 82.0% – Poverty/backwardness: 10.3% – Revenue collection/generation: 5.0%– Inverse population density: 2.7%

Increased share of Balochistan to 9.09 percent from 5.11% 70% of the divisible pool to the Provinces and Special Areas which

reflects greater financial empowerment of the Provinces other areas Compensation in lieu of Octroi and Zilla Tax GDS is being transferred to the province () The NHP to respective Provinces by FG instead of WAPDA

10

Decentralization to Line Ministries to ensure effective implementation of Government Policies

And

Impact on Central Finance Agencies

Delegated Structure of PFM

Attached Departments

Other organizations (e.g. public entities)

12

Budget Making Process

Paradigm Shift in Budget Making

13

Federal Govt prepares budget as per the MTBF In February 2009, the Cabinet approved full-rollout of

MTBF across all the Ministries in Federal Govt

Since 2009, MTBF is fully operational

The budget making process under MTBF has been made more strategic, informed and consultative

MTBF is leading to Results based Budgeting

MTBF Paradigm

14

Traditional MTBF

Annual Focus Medium Term Focus

Ignores economic forecastBased on economic forecast

Incremental Strategic

Dominated by Finance Ministry empowerment

Limited ownership Joint ownership

Concentration on inputs (resources)

Concentration on outputs (services)

Reactive & unpredictable Proactive & predictable

Medium-Term Budgetary Framework

15

The MTBF project has two major complementary components

•Strategic ‘top-down’ component sets the overall fiscal framework and provides guidance in the form of indicative budget ceilings for each ministry.

• ‘Bottom-up’ component, supports line ministries to allocate resources to their strategic priorities within the given ceilings. It focuses on line ministries

• Implementation is led by Budget Wing. Technical support is provided by a team of consultants

MTBF Objectives

16

Medium Term Budgetary Framework is an approach to budgeting which focuses the budget around achieving the government’s medium term goals

MTBF supports the three objectives of public financial management:

Fiscal discipline (ability of government to live within available resources)

Strategic prioritisation (budget preparation in accordance with priorities)

Operational efficiency (strengthening budget management by ministries)

MTBF Focus Output Based Budgeting

17

The budget prepared now focuses on outcomes and

outputs in addition to inputs Output based budgeting is a system through which Govt

can enhance its efficiency, effectiveness and economy

Output Based Budgeting

18

19

STEP BY STEP PROCESS OF BUDGET MAKING

November JanuaryDecemberOctober

1

Compile, Review & ApproveUpto PAO4e

Fill Budget Call Circular SU Forms

DDOs / Head4d

Strategic ReviewsSenior Management

4a

Identify Outputs, Finalise Internal

AllocationsSenior

Management4b

Forward MTBF BCC

and CeilingsBudget, P&D

Sections4c

?

Issue MTBF Budget Call Circular and

Indicative Ceilings3

?

Review and Approve BSP I2

Approve BSP I2

?

?

Develop MTFFMacro-Working

Group1a

START

Prepare BSP IBSP-Working

Group1b

Discuss BSP IFinance

Secretaries / Ministers1c

Review BSP IFinance Secretary

and Planning Secretary1c

Discussion Points?Macro-Working Group:1.Chair: EA2.Chief Economist3.2 Members from Finance (SS, AFS(B))4.Reps from: PC, SBP, FBR, EAD, FBS

BSP-Working Group:1.Chair: AFS(B)2.Key members from FD, PC, EAD, Prime Minister’s office

Cabinet Sub-Committee:1.Finance Minister2.Deputy Chairman PC3.Governor SBP4.2/3 Key Cabinet Ministers nominated by the PM5.Head of EAD6.FS, PS7.Provincial FMs / CSs invited to sit in

February March April May June

Budget Policy

Statement11

?

Complete and Submit ‘Green

Book’PAO13

Review & Approve

NEC12

Review & Approve

APCC

Rec + Dev (Fed + Prov)

12

?

Appropriate

Review, Approve & Submit to Parliament

FM14

Consolidate BO/NIS Format and Prepare

Budget Books14

Complete and Submit SU forms 1-3

Ministry Mgt10

Issue Modified Ceilings

9

Approve BSP2, BPS 8

Review and Approve

BSP II, BPS8

Update MTFFMacro-Working Group

Update & Discuss BSP

II, Prepare Budget Policy

StatementBSP-Working

Group7b

Discuss BSP II, BPSFinance Secretaries /

Ministers7c

Review BSP IIFS and PS

7c

7a

Submit Additional Bids

Principal Accounting

Officer6

Rec + Dev

Review budget estimates and

Approve & Prioritise

Additional BidsPriorities

Committee5

?

Review & Comment on

Additional BidsFinancial Advisors

1

ReviewChiefs /

Members4f

Rec + Dev

4f

Rec + Dev

Priorities Committee1.Joint Chair: FD, PC2.Additional Secretary level chair?3.PAO / Secretary for presentation4.Relevant members of PC (Sector Chiefs), FD (Budget wing, FAO)

22

Two Main Components

23

Two Main Components

24

Two Main Components

• Public Finance Administration Act

• Linkages with PIFRA system are underway

• MTBF linkages with Results Based Management

• Monitoring of performance is being contemplated

• Improved interaction with Parliamentarians

• Contributory Pension Fund

• Automation of Budgetary Process

25

Looking Forward

Thank You

27

Important Components of Federal BudgetActual Budget

2011-12 2012-13Tax Revenue 1,969 2,535 of which; FBR Tax 1,881 2,381Non-Tax Revenue 456 699Gross Revenues 2,424 3,234Transfer to Provinces (NFC Award) -1,090 -1,459Net Revenue available to Fed Govt. 1,334 1,775

Expenditure: 2,664 2,960Interest 889 926Defence 507 545Pensions 140 145Federal Govt Service Delivery 227 259Subsidies 166 237Grants to Provinces 55 57Grants - Other than to Provinces 293 382PSDP 317 360Net Lending etc. 70 50

Federal Fiscal Deficit -1,330 -1,185Provincial Deficit / Surplus -39 80

Consolidated Fiscal Deficit -1,369 -1,105 as % of GDP -6.6* -4.7

Rs in Million

* Excludes one off arrears

Budget Strategy

28

Consolidating Macroeconomic Stability

Acceleration of growth and employment

Continue to bring inflation down

Continued fiscal austerity

Targeted social protection

Special programmes for balancing regional development

Budget Strategy

29

Continue mobilizing domestic resources -tax policy and

administration reform by:

broadening the tax base simplification of tax rules predictable and transparent taxes elimination of discriminatory tax

exemptions

Accelerating restructuring process of PSEs

Budget Strategy

30

Tariff Rationalization

Working with Provinces for better financial discipline

PSDP: Energy sector and infrastructure development remain the focus

Focus on completion of projects

Result Based Management and selecting 3 pilot Ministries including FBR and Power Sector

Budget Strategy

31

Expenditure review and rationalization of each Ministry

Review of pay structures for removing distortions

Monetizing non-wage allowances further

Rationalizing commodity operation

Making Pension Fund for the benefits of new employees

Offering shares of profitable PSEs to benefit general public through stock market

Public Private Partnerships for improving PSEs performance

32

Economic Forecast

 

Actual Budget Projections

2011-12 2012-13 2013-14 2014-15

GDP Growth (%) 3.7 4.3 4.8 5.3

Inflation (%) 11.0 9.5 8.5 8.0

Budget Deficit (% of GDP) 6.6 * 4.7 4.2 3.7

Public Debt (% of GDP) 60.0 56.5 53.2 50.6

* Excludes one off arrears

• Federal Government is also working on a Public Finance

Administration Act

• Linkages with PIFRA system are underway

• MTBF linkages with Results Based Management is being

debated

• Monitoring of performance is being contemplated

• Improved interaction with Parliamentarians

• Contributory Pension Fund

• Automation of Budgetary Process33

What next?

Thank You