Decentralization Initiatives in Pakistan Sharing of Experience Presentation for

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2. 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, Philippines November 28-29, 2012

3. 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

4. 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

5. 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

6. 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

7. 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 Amendment • 18 Ministries were devolved to Provinces • Council of Common Interests strengthened & domain expanded from 8 to 18 Subjects

8. 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

9. 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

11. Delegated Structure of PFM Attached Departments Other organizations (e.g. public entities)

12. Budget Making Process 11

13. Paradigm Shift in Budget Making • 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 12

14. MTBF Paradigm 13

15. Medium-Term Budgetary Framework • 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 thegiven ceilings. It focuses on line ministries • Implementation is led by Budget Wing. Technical support is provided by a team of consultants 14

16. MTBF Objectives • 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) 15

17. MTBF FocusOutput Based Budgeting • 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 16

18. Output Based Budgeting 17

19. STEP BY STEP PROCESS OF BUDGET MAKING 18

20. Macro-Working Group: • Chair: EA • Chief Economist • 2 Members from Finance (SS, AFS(B)) • Reps from: PC, SBP, FBR, EAD, FBS • Cabinet Sub-Committee: • Finance Minister • Deputy Chairman PC • Governor SBP • 2/3 Key Cabinet Ministers nominated by the PM • Head of EAD • FS, PS • Provincial FMs / CSs invited to sit in • BSP-Working Group: • Chair: AFS(B) • Key members from FD, PC, EAD, Prime Minister’s office

21. Priorities Committee • Joint Chair: FD, PC • Additional Secretary level chair? • PAO / Secretary for presentation • Relevant members of PC (Sector Chiefs), FD (Budget wing, FAO)

22. Two Main Components 21

23. Two Main Components 22

24. Two Main Components 23

25. 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 Looking Forward 24

26. Thank You

27. Important Components of Federal Budget Rs in Million * Excludes one off arrears 26

28. Budget Strategy • 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 27

29. Budget Strategy • 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 28

30. Budget Strategy • 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 29

31. Budget Strategy • 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 30

32. Economic Forecast * Excludes one off arrears 31

33. 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 Process What next? 32

34. Thank You