Following the 18th Constitutional Amendment (2010) and 7th National Finance Commission (NFC) award (2009), Balochistan acquired increased competencies and resources. Balochistan has the lowest socioeconomic indicators among Pakistan’s provinces and the Government of Balochistan (GoB) is challenged to deliver public services to its citizens. Small population spread across a vast geographical area increases the cost and complexity of service delivery; Balochistan has 44 percent of Pakistan’s total land mass and only 5 percent of country’s population. Improved management of public finances is a key element to the development of the province, and public expenditure is also a major contributor to the provincial economy. The GoB is interested to improve management of public finances for better fiscal discipline and public service delivery. At the request of the GoB, the donors led by the World Bank conducted the Public Financial Management (PFM) Assessment to provide a snapshot of the provincial PFM performance and provide a credible baseline for preparation of the Government’s PFM reform strategy.

This PEFA performance assessment report reviews the performance of Balochistan’s PFM system based on an application of the 2016 Public Expenditure and Financial Accountability (PEFA) assessment methodology. The assessment captures a snapshot of the performance of the provincial government PFM system, processes, and institutions in a set of 31 performance indicators (PIs) (and associated dimensions), categorized into seven critical pillars of performance. As Balochistan is a subnational government, an additional indicator on fiscal transfer from a higher level of government (HLG) was also used. This PEFA assessment provides a baseline against which future PEFA assessments can be compared using the same scoring criteria. The institutional coverage of the assessment includes budgetary entities of the provincial government. For indicators requiring historical data, the periods covered included fiscal years 2012–13, 2013–14, and 2014–15.

This PEFA performance assessment report reviews the performance of Balochistan’s PFM system based on an application of the 2016 Public Expenditure and Financial Accountability (PEFA) assessment methodology. The assessment captures a snapshot of the performance of the provincial government PFM system, processes, and institutions in a set of 31 performance indicators (PIs) (and associated dimensions), categorized into seven critical pillars of performance. As Balochistan is a subnational government, an additional indicator on fiscal transfer from a higher level of government (HLG) was also used. This PEFA assessment provides a baseline against which future PEFA assessments can be compared using the same scoring criteria. The institutional coverage of the assessment includes budgetary entities of the provincial government. For indicators requiring historical data, the periods covered included fiscal years 2012–13, 2013–14, and 2014–15.

Aggregate Fiscal Discipline

Though over the years, the GoB has been able to curtail total annual expenditures within available resources, significant shortcomings exist resulting in low budget reliability. Since 2013–14, the GoB has been preparing an unrealistic deficit budget, which it cannot finance because in the absence of a debt strategy, the GoB is not allowed to borrow. At the year end, financial reports reveal significant variance in expenditure outturn at the aggregate level and by composition mainly because the expenditures were budgeted in excess of resources. The Government does not have a fiscal strategy and medium-term budgetary framework (MTBF) and no fiscal forecasts are prepared. There is no approved development or policy framework to link policy with the budget.

Annual budget is prepared and approved before the start of the fiscal year but the existing budget making process does not facilitate preparation of a complete and accurate budget. Budget is divided into current and development estimates and central departments (Finance and Planning) do not guide the line departments to prepare realistic budget estimates. Only a budget calendar is issued by the Finance Department (FD) which is not followed by most of the line departments. Annual process for current budget is largely an exercise that allows a certain increment over the previous year. For development budget, schemes are included in the budget without proper costing, appraisal, and approval. These schemes are approved during the year and remain unable to fully utilize the allocated budget in most cases. On the revenue side, fiscal transfers from the federal government constitute more than 90 percent of provincial receipts which are guaranteed under the 7^th NFC award. Own source tax revenue collection

targets are prepared using an incremental approach without proper analysis and the GoB has been unable to achieve revenue collection targets for any of the last three fiscal years.

There is limited public disclosure of fiscal information and serious concerns about integrity of financial data. The provincial Freedom of Information Act, 2005 falls short of international best practices and as required by the Act, the GoB has not notified all the documents that should be classified as public records. Detailed budget documents and annual audited financial statements are the only available public documents. Budget documents provide original and revised budget estimates of revenue and expenditure by budgetary units for the fiscal year, and a forecast of the fiscal deficit. Information on previous year outturn, debt stock, financial assets/liabilities, and fiscal risks is not included in the budget documents. Financial reports of the GoB are prepared periodically but only capture the budgetary entities. There are more than 50 autonomous organizations or extra-budgetary units owned or controlled by the GoB that are not captured in the financial reports. Reconciliation issues also undermine the accuracy of financial reports. As of June 30, 2015 there was a net difference of PKR 7.56 billion between book balance and bank statement. Moreover, there was a balance of about PKR 5.5 billion in the suspense account on the same date.

The GoB had not formulated a system for transparent and rules-based fiscal transfers to the local governments during the years reviewed. Balochistan Local Government Act 2010 requires the provincial government to constitute the Local Council Grants Committee (LCGC) to recommend the formula for distribution of local council grants among the local councils in the province. Elected local councils assumed office in January 2015 but to date LCGC has not been constituted. During financial year 2015–16, amount of up to PKR 4.7 billion was transferred to the bank accounts of local councils directly by the FD for which no record was available with the Accountant General (AG). Amount of PKR 11.2 billion has been budgeted as grants to local councils in the provincial budget of the financial year 2016–17, as an expenditure.

Issues in public debt management, public assets management, and fiscal risk reporting also contribute to weak aggregate fiscal discipline. No mechanism or practice exists to monitor financial performance and fiscal risk arising from public corporations and local governments; a complete list of government-owned public corporations is not available. Similarly, contingent liabilities are not monitored and reported. There is no consolidated reporting of fixed assets, nor is there any proper mechanism for appraising the performance of fixed assets. This ultimately results in poor maintenance of capital assets resulting in and a shortening of their useful life. The GoB does not have a Debt Management Strategy (DMS) and practices for debt recording, reporting, and approval are also not established.

Strategic Allocation of Resources

The processes narrated above, do not provide a conducive environment for strategic allocation of resources. The GoB has no approved strategic development plan to prioritize allocation of resources and thereafter measure development impact. Moreover, there is no practice of preparing and communicating budget ceilings to the sectors/departments. Under the current state of affairs, development schemes are budgeted without proper costing, appraisal, and approval. There are no established criteria for project selection and guidelines for project identification and appraisal are also not followed. Information systems within the line departments are either weak or nonexistent and result in duplication of public investments in one area and no investments in other areas where they are needed. On the current side, employee-related expenses consume about 75 percent of the budget limiting fiscal space for operation and maintenance expenditure. The public perception that increasing the current budget represents higher administrative cost is a deterrent to allocate required resources to the current budget. This results in a

scenario where assets are acquired and used, but not maintained. Limited participation of spending units results in allocation for low priority expenditure heads, or inadequate allocation for expenditure heads where most of the funds are required.

Linkages are also weak between the current and development budget processes. There has been a significant deviation from the budget in the composition of expenditures because of extensive executive powers of in-year budget adjustments. Therefore, strategic priorities determined through the budget process do not remain in place. There is no monitoring and reporting on the financial performance of operations and entities outside budget. Absence of a consolidated database of financial and nonfinancial assets restricts the Government’s ability to strategically allocate resources for investments and acquisition of new assets. Lastly, because of the lack of reconciliation processes and unreconciled differences, a complete and accurate picture on the availability and use of financial resources is not available.

Efficient Service Delivery

The Government Financial Management Information System (GFMIS) provides the enabling environment for efficient service delivery but the gains have not been fully captured because old processes have not been reengineered with the introduction of technology. For budget releases, parallel electronic and manual systems are followed, and spending units are not allowed to spend until they receive manual release orders; in some cases, it takes additional three months. Front line service delivery units are aggregated for budgeting and accounting though the GFMIS, which has the capability to budget and track funds to the lowest level of service delivery units.

The dimension of service delivery is not considered during budgeting and its execution. The GoB does not prepare and publish information on policy or program objectives, key PIs, outputs to be produced, and outcomes planned for programs or services that will be financed through the budget. As a result, there is no monitoring and accountability for service delivery. External audit also focuses on compliance and does not comment on service delivery performance.

In addition to delayed communication of budget release information to service delivery units, the practice of releasing the procurement budget in second semester is a constraint. Moreover, the spending units are not allowed to start the procurement process without budget release and are left with insufficient time to complete procurements after budget release. For development budget, absence of budget release policy and project-based releases limits the predictability of funds availability to service delivery units. At the Government level, as no cash forecasts are prepared, the practice adopted to manage cash balance is to release majority of the budget in last quarter. Service delivery units did not have sufficient resources for majority of the fiscal year and in the last quarter are constrained for time to spend the funds available.

Summary of the Performance Changes since 2007 Assessment

Budget credibility has deteriorated as the variance between budgeted and actual expenditure increased over the years, at aggregate level as well as by composition. The budget making process has become less organized and participatory because the central departments (FD and P&D Department) no longer provide extensive guidance and few line departments observe the timelines of the budget calendar. The transparent and rule based mechanism for fiscal transfers to the local governments no longer exist and fiscal transfers have been discretionary. No progress has been made to improve completeness of fiscal reports by capturing extra budgetary operations and the system to monitor autonomous entities, public enterprises and the local governments has not been established.

The tax administration performance has declined as rules governing assessment, controls over tax payer registration and monitoring compliance for sales tax on services are not fully established. In 2014, the GoB established BRA to collect sales tax on services which is now the largest provincial tax. BRA is a nascent entity and the rules governing assessment, controls over tax payer registration and monitoring compliance are not fully established. This has led to a lower rating for indictors related to tax administration. There has been no change in the prescribed internal control framework since the previous assessment, but external audit reported increased instances of non-compliance with the internal controls. Moreover, the GoB has not established an internal audit function. For the development budget, there is no policy for in-year budget releases and the GoB scores low for predictability in the availability of funds in the current assessment. The Government has not developed the debt management framework and no consolidated debt stock report is available which was previously provided in the budget documents. With the establishment of BPPRA, an improvement in competition, value for money and controls in procurement was noted in comparison to the previous assessment. 

Scope and timing of the financial reports has improved but regularity of reconciliation processes declined over time resulting in huge unreconciled differences. Financial reports now allow direct comparison to original budget whereas the earlier financial reports only captured actual expenditure. Monthly accounts are now prepared within two weeks of the close of the month and annual financial statements are submitted to the external audit within two months of the close of the fiscal year. However, information about assets, liabilities and commitments is still not included in the financial reports. Significant unreconciled differences in the bank balances and suspense account still exist compromising the quality of data. Cash and in kind resources received by primary service delivery units still remain unreported.

Since last assessment, the performance related to external scrutiny and audit largely remains the same. There is an improvement in the timeliness of external audit but audit coverage has decreased. Huge backlog of unexamined audit reports still exist before the PAC. Hearing of the PAC, when in session, are extensive but compliance with PAC directives remains low. Legislature is still only allowed two weeks to review budget proposal.

Government Reform Process

Based on the results of this assessment, the GoB has prepared the 10 years PFM Reform Strategy. The overall vision is to have robust and sustainable PFM systems for effective and efficient use of public resources and service delivery. The strategy based on 5 Pillars and 4 crosscutting themes is expected to be approved by provincial cabinet by June 2017. EU and the World Bank are supporting the GoB in preparing and implementing the strategy and the GoB has already started implementing some of the key reform activities. Based on a study, Finance Department (FD) has created four additional units to improve tax policy, debt management, internal audit and investment management. Efforts are underway to strengthen capacity of tax collecting agencies and improve tax administration. Subsequent to this PEFA assessment, payroll of all provincial employees has been computerized and steps taken to reconcile HR and payroll data. Progress has been made to improve budget preparation process for the fiscal year 2016-17 by developing a budget strategy paper, improved budget call circular and communicating indicative ceiling to the largest spending departments. For sustainable capacity building, in collaboration with Auditor General and academia, a comprehensive PFM certification program is being developed for induction and in service training of civil servants.