Funds transferred to provinces: Centre takes its first steps towards monitoring spending

ISLAMABAD: The Finance Division is said to have been directed to devise a "robust" mechanism to monitor the spending of funds transferred by the Federal Government to the provinces as a splurge on administrative expenses was often witnessed instead of improving the quality of life of the citizens, sources close to Finance Minister informed Business Recorder.

Finance Division, sources said, has been given instructions by the Cabinet in its last meeting, in this regard after detailed discussion on a presentation on finance provided to the Provinces from the divisible pool.

The Federal Government is also expected to stop funding for provincial projects which have limited scope.

The sources said, main source of the revenues of the provinces are; (a) divisible pool share under Article 160 of the Constitution and NFC Award; (b) Straight Transfers. These include proceeds of excise duty on natural gas and royalty on gas under Article 161 of the Constitution and royalty on crude oil and gas development surcharge under NFC Award. The entire proceeds after deducting 2% as collection charges are transferred to the province from where it is collected;(c) Grants in Aid (Grant to Sindh in lieu of losses sustained by that province on account of abolition of Octroi and Zilla tax), Grants to Balochistan in lieu of arrears of gas development surcharge collected by the Federal Government prior to 1991-92 (under Aghaz-e-Huqooq-e-Balochistan Package) and grants to KP to meet the current expenditures of erstwhile FATA;(d) Development grants to provinces. The Federal Government is also providing development grants for certain projects of provinces through federal PSDP with the approval of National Economic Council (NEC) and (e) provincial own tax and non-tax receipts.

As per the formula to compute the divisible pool taxes, the non- divisible pool components are subtracted first to calculate the Gross Divisible Pool Taxes. Non-divisible pool components are workers' welfare fund, Federal Employees Income Tax, GST on Services collected from ICT, Export Development Surcharge and Excise Duty on Gas. In order to arrive at net proceeds of divisible pool taxes, 1% is subtracted as collection charges. After this 1% is set aside to release to the KP Government on account of expenditures on War on Terror the balance is divided between federation and provinces at the ratio of 42.5.57.5.

A combined picture of resources availability position of provinces as well as province-wise resources availability position is as follows": (i) The total resources availability position of provinces (combined) was Rs.2.924 trillion and 3.161 trillion during FY 2018-19 and FY 2019-20, respectively, out of which the provincial own receipts were 497 billion and Rs.524 billion, respectively. The total budgeted receipts for FY 2020-21 are Rs.3.812 trillion, the provincial own receipts budgeted at only Rs.721 billion. The actual realization up to November 30, 2020 against these budgeted targets are Rs.1.289 trillion and Rs.228 billion. On average, out of the total resources of the provinces, around 17% comes from their own resources and 83% through federal transfers;(ii) the total resources availability position of Punjab were Rs.1.409 trillion and 1.454 trillion during FY 2018-19 and FY 2019-20 respectively. Out of which the provincial own receipts were 240 billion Rs.251 billion respectively. The total budgeted receipts for FY 2020-21 are of Rs.1.749 trillion, the provincial own receipts are only of Rs.307 billion. The actual realization up to November 30, 2020 against these budgeted targets are Rs.574 billion and Rs.108 billion. On the average, out of the total resources of the provinces, around 17% comes from their own resources and 83% through federal transfers;(iii) the total resources availability position of Sindh is Rs.802 billion and 823 billion during FT 2018-19 and FY 2019-20, respectively, out of which the provincial own receipts were of 188 billion and Rs.192 billion, respectively. The total budgeted receipts for FY 2020-21 are projected at Rs.1.078 trillion while the provincial own receipts at Rs.314 billion. The actual realization up to November 30, 2020 against these budgeted targets was Rs.345 billion and Rs.88 billion. On averages out of the total resources of the provinces, around 23% comes from their own resources and 77% through federal transfers; (iv) the total resources availability position of Khyber Pakhtunkhwa was Rs.446 billion and 558 billion during FY 2018-19 and FY 2019-20, respectively, out of which the provincial own receipts were 52 billion and Rs.58 billion, respectively. The total receipts for FY 2020-21 are budgeted at Rs.652 billion while the provincial own receipts at Rs.49 billion. The actual realization up to November 30, 2020 against these budgeted targets was Rs.242 billion and Rs.22 billion. On average, out of the total resources of the provinces, less than 10% comes from their own resources; (v) the total resources availability position of Balochistan was Rs.267 billion and 326 billion during FY 2018-19 and FY 2019-20, respectively, out of which the provincial own receipts were of 18 billion and Rs.22 billion, respectively. The total budgeted receipts for FY 2020-21 are Rs.334 billion while the provincial own receipts only of Rs.51 billion. The actual realizations up to November 30, 2020 against these budgeted targets are Rs.128 billion and Rs.11 billion. On average, out of the total resources of the provinces, less than 10% comes from their own resources.

During a discussion, a member pointed out that as a consequence of 7th NFC Award, the balance had been tipped in favour of the provinces. The increased reliance on federal transfers had acted as a disincentive for the provinces to increase generation from their own resources. Furthermore, the 18th amendment was complemented by the 7th NFC Award in hope that quality of delivery and governance for the devolved subjects would improve but that had not been the case. Thus, there was a need for proper debate prior to the NFC Award.

It was pointed out that the formula for distribution of resources was ingrained in the Constitution and could not change; however, there was a need to make it mandatory that 30-40% of money transferred to the provinces reached the local governments. In addition, the federal government should confine itself to only undertaking those projects, whose benefits were inter-provincial. The projects whose benefits were limited to a particular province should be executed by the province from its own resources.

The efficient use of funds transferred to the provinces was also highlighted. It was underscored that a mechanism needed to be devised to monitor where the money was being spent as a splurge on administrative expenses had often been witnessed rather than improving the quality of life of citizens.

Attention was drawn to the injudicious spending of foreign funds, other than loans, and it was suggested that Economic Affairs Division (EAD) should be asked to present details to the Cabinet. The Minister for Economic Affairs stated that the total quantum of such grants was to the tune of Rs 70 billion only and it was the donors who usually choose the sectors and regions to be supported.

After a detailed discussion, the cabinet directed the sponsoring Division to devise a robust mechanism to monitor the spending of the funds transferred by the federal government to the provinces.

The Cabinet also directed the Economic Affairs Division to present details of the foreign funds, other than loans, and their utilization in the next meeting of the Cabinet.

Copyright Business Recorder, 2020