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Province Finance Commission, Devolution and ADB's Support¹

Presented by
Mr. M. Ali Shah
Country Director
Pakistan Resident Mission
Asian Development Bank

Lahore, Pakistan
16 December 2003

Honourable Chief Minister, members cabinet Punjab Government, Distinguished Guests, Ladies and Gentlemen.

• Pakistan's bold governance reforms of the past three years are now a matter of international acclaim. These reforms herald the government's commitment to address long standing development issues arising during the decade of 1990s including the combination of low economic growth, declining public sector expenditure on development, deterioration in service delivery and increase in poverty.



• The Devolution Plan of 2000 set out a far-reaching agenda of reforms, beginning at local government levels, but extending right through to all aspects of federal, provincial and local relations. Whereas some aspects of the original agenda remain to be addressed, in particular, reshaping of federal and province relations and responsibilities, the progress achieved so far is heartening. Most notable has been creation of a new local government system and the election of 126,462 councillors to bring representation of citizens in decision-making affecting their lives. Greater gender balance has been achieved through inclusion of around 38,000 women councillors.



• Pakistan's decentralised governance reforms have some additional distinctive features as well. We can count removal of the rural-urban divide in the Tehsil Municipal Authority (TMA), the creation of citizen participation bodies like Citizen Community Boards, Insaaf Committees, the Mushavirat Committee for integrated strategic local government planning and Public Safety Commissions are some which are rooted in international practice but will find their ultimate moorings in the local context. These new bodies provide unprecedented opportunities for citizens to both express their preferences and to hold elected representatives and the executive accountable for their conduct. It is not surprising therefore that devolution has a central place in Pakistan's Poverty Reduction Strategy.



• The Province Finance Commissions (PFCs) can play a crucial role in the reforms. As institutional entities to support efforts for timely, well-researched technical awards of revenue sharing to local governments, PFCs provide an important mechanism to underpin local government performance with improved service delivery. At the same time the work of PFCs can encourage, and reward, greater emphasis on fiscal efficiency and local revenue generation to finance local development.



• Creation of grant systems, which work on the basis of formulae, are another innovation that have the potential of reorienting local governments towards performance. There are many ways in which grant systems have been designed and implemented in various countries. But at the same time there are principles and practices common to all of them. For these grant systems to yield the best results, they must be crafted in such a way as to respond to the local milieu and the rich diversity in the four provinces of Pakistan. However, there is much to be learned from international practices, such as will begin to be shared through this Workshop.



• The PFCs will only add value to the government's working once they are well equipped and adequately staffed. It is heartening to note that under the Decentralisation Support Programme as well as through their normal budgetary avenues the provinces are allocating resources to institutionalise systems that can support emergence of formula based grant systems. In this regard adequate equipment, trained professional staff and secretariat are the prerequisites without which learning acquired through training and activities like this workshop will prove to be of ephemeral value. Timely information for decision making, analytical ability and updated fiscal data will be some of the benefits that will accrue to the working of the Department of Finance. It is essential that in the form of Province Finance Commission (PFC) secretariats a permanent group of professionals is created in whose capacity then investment can take place over time. The PFC secretariat will thus be a source of support to the work of province Departments of Finance as well as departments like education and health.



• Working out arrangements for fiscal management in a federal system is complex any where in the world. It requires a combination of political systems and skills as well as technical solutions. The Province Finance Commissions embody this complex role for local-provincial relations in Pakistan. It is true that the design of grant systems will not automatically emerge from a technical study or an analysis of data systems. At the same time it is also a fact that simplistic solutions based on inadequate analytic work will lead to sub-optimal outcomes. These may be in the form of inadequate realisation of the potential benefits that properly designed systems can afford to service delivery or may be in the form of creation of perverse incentives that militate against efficiency in fiscal management or improvements in performance of local governments.



• Therefore technical details lie at the centre of PFC work. Through appropriately designed and maintained data systems, both for fiscal and service delivery data, PFCs will be able to present a range of options for policy choices to government decision makers. At the same time departmental policies and programmes can be evaluated on the basis of analytic work arising from the PFC systems. In time PFCs can lead the change from vertical programmes to alternatives like conditional grants, performance contracts and incentive grants. This transition will be a critical step in improving local government performance and achieving better service delivery.

The current status of PFC work is an important stage and can benefit a lot from such workshops as we have today.

• The Asian Development Bank through the Decentralisation Support Programme (DSP) approved in November 2002 for $300 million will continue to support government's commitment to reforms with adequate technical assistance. We hope to follow up this workshop with support for future investment in the capacity of PFCs and their secretariats. Development of Pakistan's systems can benefit from learning based on similar as well as dissimilar arrangements from other countries.



• Pakistan's governance reforms have emerged as the central pillar to ADB's Country Strategy and Program. Through programs like the DSP and Access to Justice Program which we approved in December 2001 for $350 million, as well as the recently approved Punjab Public Resource Management program and a host of supporting technical assistance projects, almost a quarter of all ADB lending focuses on governance reforms. These are complemented by other efforts, such as through the Decentralised Social Services Program in Sindh approved last week, to ensure that provinces and local governments are provided with sufficient budgetary and technical support to see the reform process to its ultimate conclusion in sustainable reductions in poverty. We see these as long-range initiatives requiring long-term support.



• In recent years Pakistan's decentralisation reform has been one of the most bold and wide ranging in the region but an initiative that still requires many details to be worked out at various levels of government. It was not only the initial impetus but also the diligent implementation by the various government agencies that has been commendable. In this regard the role of the provincial governments has been of special significance. Without the provincial support implementation would have remained in the doldrums. From working out of details of institutional arrangements to placement of qualified personnel the provincial government played their role in putting the design of the local governments on ground.

In sum, the Asian Development Bank is pleased to be able to support the deliberations of this important workshop. We stand ready to respond as required to the recommendations of this workshop as well as the longer haul of technical and capacity building efforts that will be required to ensure Province Finance Commissions are able to fulfil their crucial and demanding mandate.

Thank you