Pakistan Sindh Province 2020
Purpose and management of the assessment
The purpose of the 2019 PEFA assessment is to provide to the government of Sindh and the development partners with an objective and up-to-date analysis of the performance of the PFM system in Sindh using the latest internationally recognized PEFA methodology (2016 PEFA). The PEFA assessment provides an update on progress on PFM in Sindh since the last PEFA assessment, which was conducted in 2013, and establishes a new PEFA baseline using the 2016 PEFA methodology. This methodology identifies seven pillars of performance that are essential for an open and orderly PFM system. These include budget reliability, transparency of public finances, management of assets and liabilities, policy-based fiscal strategy and budgeting, predictability and control in budget execution, accounting and reporting, and external scrutiny and audit.
The PEFA assessment also seeks to build a shared understanding of PFM performance and those dimensions that require attention and improvement. The results of the assessment are expected to assist the government in monitoring the implementation of Sindh’s Public Financial Management Reform Strategy to achieve long-term sustainability.
This PEFA assessment has been completed as a collaborative exercise led by the GoS in partnership with the participating DPs. The team administering the review included European Union, the World Bank staff, and PEFA experts (Consultant). PEFA Steering Committee, chaired by the Secretary Finance and comprising of the heads of the key stakeholders in GoS, provided oversight. The Economic Reforms Unit coordinated the activity on behalf of GoS. A broad quality assurance mechanism was put in place comprising of the sector specialists at the World Bank and the external peer reviewers, including PEFA Secretariat and EU.
Assessment coverage and timing
The assessment covers expenditures by the Sindh government, budgetary units and revenues collected by the different provincial entities, including but not limited to, Sindh Revenue Board and Excise, Taxation and Narcotics Control Department (ETNCD). The assessment also examines operations outside the Sindh government, mainly State-Owned enterprises, Autonomous Bodies (AB), and Self Accounting Entities (SAE), but only to the extent that they have an impact on the fiscal performance of the Sindh government, including fiscal risk reporting. Activities of subnational governments have been examined only in terms of transfers to the local government, while foreign financing is contracted by the Federal government on behalf of the provincial governments through Economic Affairs Division (EAD) which is then passed on to the provinces, with the foreign financing for provincial governments records being maintained by the federal government. The 18th Constitutional Amendment has allowed the provinces to raise domestic or international debt or provide guarantees against the security of the Provincial Consolidated Fund within limits and subject to conditions as may be specified by the National Economic Council. In August 2017, the provinces agreed on a framework for debt creation and debt management by the province whereby the domestic borrowing limit for provinces was increased from 0.5% to 0.85% of GDP.
The PEFA assessment started in December 2018 following the formal launch workshop attended by an inter-agency working group comprising of key ministries, departments and agencies covered by the assessment. The main fieldwork mission took place during the period February 25 – March 12, 2019 during which data for most of the indicators was collected. Assessment of the indicators continued during the period of March - April 2019, enabling the drafting of report that was completed during the month of August 2019. The assessment covered the financial years 2015-16, 2016-17 and 2017-18.
Impact of PFM Systems on the three main budgetary outcomes
At the policy level, Sindh Provincial Assembly has a key role in authorizing revenues, expenditures, and debt. The Finance Department plays a pivotal role in budget preparation and expenditure control. Departments and SOEs have well-defined roles in implementing budgets and submitting accounts for incurred expenditures. The Controller General of Accounts, with an extensive network of offices including the Accountant General Sindh, makes payments, maintains accounts, and prepares annual financial statements. The Auditor General of Pakistan has an extensive organization to conduct financial compliance audits, and through DG Audit Sindh, undertakes various audits of Sindh Government. State Bank of Pakistan (SBP) acts as banker for the government, and the government-owned National Bank of Pakistan acts as agent of the SBP in areas where SBP does not have a branch
A. Aggregate fiscal discipline
This PEFA assessment highlighted the inadequacies in aggregate fiscal discipline as evidenced in the expenditure and revenue outturns. The Government of Sindh does have a budget law, namely Sindh Financial Management and Accountability Act 2011, and the budgetary process is supported by Sindh Budget Manual. However, its implementation of the budget law remains an issue as evidenced by the many budget adjustments. These adjustments, though legally provided for, are without limits on the number of adjustments; lack adequate legislative oversight and does not fully comply with the guidelines of the Finance Department and Planning and Development Department which has impacted the fiscal discipline of the GoS resulting in significant revenue and expenditure outturns.
Pakistan’s PFM system is regulated and guided by different sets of regulations and procedures, including General Financial Rules (GFR), Treasury Rules, New Accounting Model, Fundamental Rules and Supplementary Rules (FR & SR), Account Code, Audit Code, Drawing and Disbursing Officers Handbook, etc., which contain contradictions and gaps. Also, there is no clear requirement for budget funds to be held in a Treasury Single Account (TSA) nor any limit on in-year re-appropriations. In addition, there are no fiscal transparency requirements and no provision of recording new commitments. While there is an internal audit function established and housed within the Finance Department, its coverage remains limited to a few departments. Some of the low scores under pillars (II-VII) weigh in on the overall performance of Pillar I (Budget reliability).
Deficiencies in revenue administration range from risk management, arrears monitoring and revenue audits. Estimates for expenditures are based on inflated revenue targets, rendering the development budget formulation unrealistic, as is evident from the repeated budget cuts and revisions. Disintegrated budgeting overshadows the impact of development budget on recurrent and, as a result, a holistic view of the budget is not available.
An effective internal control framework/charter has led to strengthening of internal controls in some departments. However, the coverage of internal audit functions is limited in scope and focus and thus does not improve the weak internal controls. The Public Accounts Committee (PAC) has repeatedly observed the lack of interest of the Executive to comply with its directions.
The cash management regime is not sufficiently developed in Sindh. The absence of an effective cash management system in the form of a Treasury Single Account (TSA) has resulted in various government entities having separate bank accounts in commercial banks. Two major factors incentivize government departments to keep cash outside the TSA. First, given the highly centralized payment authorization system and absence of a legal framework, the departments tend to keep unspent balances in private commercial bank accounts and second is the lack of sufficient IT infrastructure makes it difficult to set up a seamless system of e-payment. As a result of above, the balances in these accounts are not shown in any fiscal reports, although they do appear in the State Bank of Pakistan’s data on the banking sector. This practice has a significant negative impact as it artificially understates government cash positions leading to overestimate short-term borrowing needs.
B Strategic allocation of resources
During the assessment, vulnerabilities relating to project planning, costing, prioritization and screening were highlighted in terms of strategic allocation of resources. Additionally, the incremental increases in the Annual Development Program (ADP), conveyed in the Finance Department as well as Planning and Development Department’s guidelines, undermine the utility of the medium-term and output-based budgeting. The 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 impact of the current year’s capital investment decisions on the recurrent budget are unknown constraining strategic budget management practices. The graduation of output-based medium-term budgetary framework to the whole of the government has not taken place and limits the linking of 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 strategic allocation of resources. However, under the current practice, BSP is not required to be approved by the Provincial Assembly. BSP is approved by the Provincial Cabinet and is submitted to the Standing Committee on Finance.
The existing development budget practices do not support effective public investment management (PIM). Although the guidelines on the ADP formulation recommends that line departments align with the investment decisions with the Sindh Vision 2025, the lack of ‘costed sectoral strategies’ undermines the value for money perspective in capital investments. While the vulnerabilities in project planning, costing, appraisal and massive budget adjustments impacted the public sector portfolio management, rationalization of the development budget has not been afforded a priority. There are no 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. Thus, the ADP is neither realistic nor manageable which impedes overall public investment management.
C Efficient use of resources for service delivery
An effective PFM framework provides an enabling environment for better service delivery within the available resources. There have been initiatives to improve service delivery that have not materialized because the details of the PFM system were not delivering directly. In addition, the lack of timely availability of the indicative budget ceilings have undermined proper planning by the service delivery units, and the lack of budget codes for lower tiers of the service delivery units in GFMIS has emasculated expenditure tracking.
Effective internal controls promote innovations in service delivery and 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 have overshadowed it. The procedural complexities, lack of integrated systems as well as capacity are constraining innovations in the service delivery. While the output-based and medium-term budgeting are essential elements in service delivery, the fundamentals are not applied to realize these objectives. Fragmented budgeting, uninformed resource allocations, manual processes parallel to automated systems, and poor incentive regime are all features of the system and impact on effective delivery.
The existence of large expenditure arrears points to the deficiencies in the budget allocations vis-à-vis cash availability to the spending units. The absence of the commitment accounting practices has concealed the under swell created by expenditure arrears. What appears to be efficient budget utilization is illusive. Inadequate cash releases in a milieu of sizeable arrears have fostered moral hazard. The wage bill consumes the largest share of resources leaving limited finances for non-salary budget – essential to innovate and improve service delivery. With over a million government servants, the periodic payroll audit becomes critical to ensure a potential ghost workers phenomenon is kept at bay.
Performance changes since PEFA assessment 2013
Sindh Government’s previous PEFA assessment was conducted in 2013 using the PEFA 2011 framework. Annex 4 provides a comparison in terms of the performance trajectory based on the PEFA undertaken in 2013 using 2011 framework and the current PEFA assessment using the same methodology
On a comparable basis, performance improved in 9 dimensions, declined in 10 indicators while it remained the same under 10 dimensions. Prima facie, performance deteriorated on a quite a few indicators, however, it was not entirely due to the government’s performance but rather the change in indicator scoring may also have contributed to some of the low scores as previous scores may have been too optimistic.
The comparison shows that the budget credibility improved as the composition variance expenditure declined while the aggregate level performed the same. The overall budgeting process remained somewhat organized with continued adherence to budget calendar by the line departments, but a declined-on guidance provided to line departments. The budget approval by the legislature continued to be timely. The multiyear perspective in fiscal planning, expenditure policy, and budgeting showed improvement as compared to the previous assessment undertaken in 2013. The comprehensive rollout of the GFMIS enhanced the quality of information in the budget execution reports.
Deficiencies were noted in oversight of fiscal policy and tax collection. The institutional mechanism for fiscal reporting did not improve in capturing the extra-budgetary operations and information on off-budget donor-funded projects. Neither was improvement noted in the oversight of aggregate fiscal risk from public sector entities/autonomous entities. There has been some improvement in taxpayer registration but collection of taxes which remain an issue has deteriorated.
Performance regarding the effectiveness of the payroll improved since the previous assessment as did effectiveness of internal controls on non-salary expenditure due improved compliance with rules for processing and recording transactions. While limited, the coverage of the internal audit function has shown improvement. The internal audit function has been made operational through Internal Audit Charter and internal audits have been initiated in some departments, the focus of internal audit work is still on financial compliance and not on strengthening the internal controls. Finally, the lack of management response continues to undermine the deepening of fiduciary controls.
In summary, aggregate fiscal discipline improved due to better payroll, procurement, and internal control and audit. However, neither the strategic allocation of resources nor service delivery outcomes exhibited the same degree of improvement in relevant indicators and deteriorated in some instances such as availability of information on resources received by services delivery units. However, the existence of sector strategies with multiyear costing of recurrent and investment expenditure did improve marginally.
Prospects for reform planning and implementation
The 18th Amendment to Pakistan’s Constitution reasserted the federalist character of Pakistani state. Among others, the amendment transferred hitherto federal functions, including responsibility for education, health, environment, and agriculture, to provinces and expanded the mandate of the Council of Common Interests (CCI) to coordinate intergovernmental relations; assigned taxing authority for sales taxes on services to the provinces; and provided the provinces with borrowing authority. Taxes on agricultural income, immovable property, estate and inheritance, and zakat and usher (religious taxes) were returned to the provinces for levy and collection. These recent efforts set the stage for provincial governments to improve local-level participation in governments and gave them a mandate to further decentralize to locally elected representatives.
These reforms were also an opportune moment for the provincial government to take a fresh look at their roles and mandates. For instance, the amendment not only changed the composition of the CCI but also entrusted the CCI with decision-making, monitoring, supervision, and control over matters included in the Federal Legislative List Part II9 and related institutions. It also made the National Economic Council (NEC) more responsive to provincial needs. The NEC is expected, under the Constitution, to meet twice a year with the mandate to formulate plans on financial, commercial, social and economic policies.
Needless to state, policy orientations and structural transformation must be practiced in a political economy where varied interests tend to slow down the progress or otherwise, if inadequately incentivized. What may look initially as a failure to reform may provide the necessary impetus for a subsequent major policy change. And what looks like a successful reform may eventually be reversed. In Pakistan, albeit on a wider spectrum, the introduction of the autonomous local government system (2001) and the Government Financial Management Information System (GFMIS) (1998) provides evidence to the latter and the former.
The literature on governance reforms acknowledges the long gestation period of the reforms to gain traction. Sindh Government has demonstrated stewardship and perseverance, evident from the continuity of reform efforts, however the focus has primarily been on the establishment of the institutions, introduction of advanced tools (such as MTFF, Debt Policy Unit, output-based budgeting, and policy and strategy formulations). Continued collaboration is now needed to coordinate these efforts among the stakeholders (Line Departments, Audit, and Legislature) to ensure its application by all, which could be accomplished with a capacity development response reaching out to a broader group for wider knowledge transfer. With the introduction of modern tools, the Sindh Government needs to focus on building analytical capacity of the individuals to help appreciate the utility of these tools and its implementation. Continuous efforts are required through advocacy and dialogue for attitudinal change, and it is imperative that the practices (manual processing, annual budgeting approach, and so on) prevailing before the introduction of modern methods are discontinued to realize the potential of the modern tools and the automated systems.