Pakistan Punjab Province 2019
Purpose and Management
- The sequel to the Punjab Growth Strategy is currently being formulated and the GoPb plans to embed the second-generation PFM reforms with its overall growth strategy. To steer the reforms agenda, GoPb requested a review on the upgraded PEFA Framework (2016). PEFA assessments in 2007 and 2012 informed the reform dialogue while other targeted diagnostics were commissioned to determine performance causality to guide the reform implementation. These included the Open Budget Survey (OBS), Fiduciary Risk Assessment (FRA) and other bespoke public expenditure reviews during 2014-2017.
- This PEFA assessment has been completed as a collaborative exercise led by the GoPb in partnership with the participating Development Partners. The Team administering the review included DFID (UK), the World Bank and PEFA expert (Consultant). The PEFA Steering Committee, chaired by the Secretary Finance and comprising the heads of the key stakeholders in GoPb, provided oversight and strategic direction. A comprehensive quality assurance mechanism was put in place involving the Sector Specialists at the World Bank and the external peer reviewers including the PEFA Secretariat and DFID (Details in Section 1.2).
Scope, coverage, and timing
- The review applied the PEFA Framework 2016 and the related guidance for sub-national assessment. The coverage of the assessment is the Punjab provincial government fiscal operations while the lower level local governments, public sector enterprises and the extra-budgetary units in Punjab are covered to the extent of financial reporting against allocated budget. The cut-off date for the assessment was 30 June 2018 and the review period included fiscal year 2015-16, 2016-17 and 2017-18 (Chronology in Table 1.1).
Impact of PFM on budgetary and fiscal outcomes
- The results, based on the PEFA Framework (2016) signals the tenacity of challenges on a range of PFM jurisdictions. These include fiscal oversight, asset and liability management, performance and strategic perspective in budgeting, policy based fiscal strategy, revenue risk management, commitment accounting and external audit. However, there are notable redeeming features of high performance such as the controls on the aggregate expenditure outturns, improved public disclosure and a robust budget classification system.
- The results of the current PEFA assessment are viewed in the context of the three budgetary outcomes - aggregate fiscal discipline, strategic allocation of resources and the efficient use of resources for service delivery.
Aggregate fiscal discipline
- Fiscal transfers constitute around 77 percent of the total Punjab government’s receipts . The variation in the fiscal transfers and provincial own source revenue outturns impacted on fiscal discipline as both categories of actual revenue were significantly below the budgeted amounts . At the aggregate level the government managed the expenditure outturns relative to that budgeted; however the variations in the economic and functional classification wise expenditure overshadowed the overall government’s performance.
- The expenditure projections are based on uninformed revenue targets evident from the budget revisions, while excessive virements during the year is discouraging improvements at the planning stage. The lack of a robust fiscal strategy, the absence of the determination of the fiscal impact of expenditure and revenue policy proposals and the fragilities in the revenue management (risk management, arrears monitoring, and audits) were the key challenges to the fiscal discipline.
Strategic allocation of resources
- Decision-making in the PFM realm is characterized by a one-year vision owing to the lack of a medium term perspective in budgeting. The situation is aggravated when the the impact of the current year’s capital investment decisions on the recurrent budget is unknown, thus constraining strategic budget management. It has been 16 years since the Government of Punjab took the policy decision to adopt the output based and medium term budgetary framework and yet it has been only partially implemented. Its graduation to the whole of the government is critical to help linking policy planning to budget.
- The Budget Strategy Paper (BSP) that provides the fiscal aggregates and the status of the overall budget position in the projected years facilitated the strategic allocation of resources. However, the practice of the preparation of the BSP was discontinued and while it resumed in 2017-18, its non-submission to the Cabinet diluted the effectiveness of the strategy. Regular preparation of the BSP, connecting it with sector strategies and obtaining the legislature’s approval would ensure allocative efficiency and foster accountability.
- The existing development budget practices do not support effective public investment management (PIM). Although the guidelines on the Annual Development Program (ADP) formulation recommends the Line Departments to align the investment decisions with the Punjab Growth Strategy (2014-18), the lack of ‘costed sectoral strategies’ undermined the value for money (VfM) perspective in public investment. The vulnerabilities in project planning, costing, appraisal and massive budget adjustments have all impacted the public sector portfolio management. The rationalization of the development budget should be given a priority. GoPb may consider introducing criteria for the ADP to include only those schemes that are highly complex and capital intensive and those projects that have externalities for other districts. This will make the ADP realistic and improve the overall public investment management.
Efficient use of resources for service delivery
- An open and orderly PFM provides an enabling environment for better service delivery. The current PFM practices in the province lack the performance perspective that attenuates the strategic allocation of resources. The unavailability of indicative budget ceilings undermines proper planning by the service delivery units, while the lack of budget codes for lower tiers of the service delivery units in GFMIS obfuscates expenditure tracking.
- Effective internal controls promote innovations in the service delivery while excessive controls stifle it. The introduction of the grants to service delivery units in the education sector was meant to promote creativity but excessive controls overshadowed it. The procedural complexities, lack of integrated systems and capacity are constraining innovations in service delivery. Although output-based and medium term budgeting are essential elements, the fundamentals need to be set right. Modern budgeting in the traditional setting comprising of fragmented budgeting, uninformed resource allocations, manual processes parallel to automated systems, poor incentive regime and so on can have a counter effect on the reform efforts.
- The existence of large expenditure arrears points to deficiencies in the budget allocations vis-à-vis cash availability to the spending units. As well the absence of the commitment accounting practices has concealed the under swell created due to expenditure arrears. What appears to be efficient budget utilization could be illusive. Inadequate cash releases in a milieu of sizeable arrears can foster moral hazard. The provincial wage bill consumes the largest share of resources, leaving limited finances for the non salary budget. With a large number of civil servants it is essential to introduce system based payroll-budget checks, an effective internal audit framework and more importantly periodic pay roll audit to keep the ghost workers phenomenon at bay.
Performance changes since PEFA assessment 2012
- The advancements in the PEFA Framework (2016) with the upgraded methodology, extended coverage and revised scoring criteria have influenced the results. However, the comparative analysis between PEFA 2012 and PEFA 2019 using the previous PEFA framework (2011) reveals a number of bright spots (See Annex 4). The Government’s ownership was the key factor sustaining the spirit of the PFM reforms.
- The comparative results certify that the Government of Punjab managed to stay the course of PFM reforms with 62 percent of the indicators showing favorable results (C and above). Of the total 29 performance indicators including (HLG), the performance did not change on 13 indicators while 5 indicators recorded improvement. Although, the performance appears to have deteriorated on 11 indicators, it is important to note that it cannot be entirely attributed to the government’s performance but rather to the optimism in the previous review. This has led to the decrease in the rating of 6 indicators.
- The improvement in 5 indicators included the Government’s efforts to maintain fiscal discipline in expenditure management at the aggregate level while the compositional outturns compared to PEFA 2012 recorded a minor improvement. The controls in the tax payer registration system was the only tax dimension that documented improved rating due to the introduction of the tax payer’s identification number for GST on services. The debt sustainabilty analysis conducted by the FD in collaboration with the World Bank and the consolidation of cash balances improved the cash and debt management scores. The legal framework provided for procurement operations led to a slight improvement on the overall indicator, however this requires continued attention for making procurement operations transparent and competitive.
- Where the rating declined due to poor performance. the 5 indicators included the lack of reliability of the revenue forecasts. The performance on revenue adminstration was found lagging and requires immediate attention. Although, the devolution of the GST on services has remarkably improved tax collection, it is yet to be ascertained whether collection is commensurates with the revenue potential. It also needs to be explored how much of the revenue is lost owing to the absence of robust revenue risk management, audit and investigation mechanisms. The transparency of the intergovernmental fiscal relations was influenced by the late communication of the budget allocations to the lower level local governments. The oversight of the public sector enterprises and autonomous bodies deteriorated. With an increase in the number and the volume of such entities, improving government oversight is vital. The medium term perspective in fiscal planning has remained a weak area, despite being part of the government’s commitment to introduce a medium term perspective and performance orientation to its budget. The audit coverage in relation to the PEFA 2012 decreased, resulting in a lower score.
PFM reform agenda
- The qualified and experienced leadership in the Punjab Finance Department assisted in generating the appreciation of the significance of the PFM reforms, which was evidenced by active participation in setting the reform agenda. A dash board was developed for the Finance Minister and the Secretary requiring fortnightly updates to monitor the reform implementation.
- Key reform efforts in Punjab included the reorganization of the Finance Department. To increase fiscal oversight the Corporate Finance Unit was established; however it is only responsible for the companies created under the Companies Act, 2017. Enhancing its scope will aid in compiling full picture of the GoPb fiscal operations. The Debt Management Unit was formed; however a medium debt management strategy is still lacking to guide the Government’s debt related decisions and its proposals for the debt management framework in the changed landscape of fiscal federalism (2010). Although the tax reform unit has been created and tax collection has improved since the devolution of General Sales Tax (GST) on services, the own source revenue management needs government’s attention. Currently the focus of reform efforts is mainly on the GST which needs to be extended to other provincial taxes.
- The Government’s plan for the second-generation PFM reforms coincides with the new government elected to office in 2018. Although the signs of the reforms continuity exist, however the pace of reforms in future would reflect the ownership and the interest of the new regime.
- The following table provides the summary ratings of the current assessment using the PEFA Framework 2016. Details of the assessment and the narrative are provided in Section 3.
 Development budget, mananged by the planning and development department, initially comprised of the public investments (capital expenditure), however it now also inlcudes items of non capital nature.
 Ruffner, M & Sevilla, J (2004), ‘Public Sector Modernisation: Modernising Accountability and Control’ OECD Journal on Budgeting, Vol. 4 No. 2