The Punjab government has decided to launch a new grant system, effective after completion of local bodies election, to provide a transparent, predictable and incentive driven grant system to local governments, for improving their performance and bringing an immediate improvement in service delivery for the people of the province.
According to an official source, an orderly transition has been steered by the Finance Department from a central planning and budget mechanism to a system based on precepts of fiscal decentralisation. As a result, 34 district governments, 122 TMAs and 3,053 union administrations have basic capacity to plan and implement budgets.
Simultaneously, inter-governmental transfers have been providing most of the revenues to the LGs to ensure adequate service delivery to the people of the province.
According to a source of Finance Department, the new grant system has been created with the aim of creating a hard budget constraint for all actors, and organising the province-local finance on a footing, which primes the system towards achievement of provincial policy priorities of poverty reduction, economic growth and development.
The grant system has been designed to provide a proper policy and financing instrument in line with the Punjab government's priority of upgrading systems to meet the increasing demand of good services in the province.
The new grants system can be designed to bring local government functioning in line with Punjab government's development policy priorities and provide an instrument to Finance Department:
-- To determine the level and size of investments in various sectors of development (in line with the provincial government's allocative efficiency and equity principles),
-- Provision of adequate revenues to local governments in Punjab,
-- Ensuring sufficient fiscal capacity for meeting the development goals as well as promotion of reliance on own source revenues.
Introducing incentives for higher performance in service delivery and resource management, official sources mentioned that the grant system had been built on the experience of the interim awards, made since June 2002. It is a major step forward towards a mature grant system, incorporating the lesion of the early transition.
At the same time it is a major initiative of the provincial government in consolidating the change and ensuring a norm based transfer system.
Grants will be a major instrument of the province for ensuring action by the local governments on the Chief Minister's policy priorities. It will allow provincial departments to reorient towards policy guidance, setting of performance targets, monitoring and support for achievement of Chief Minister's policy priorities.
The grant system is being finalised early to provide sufficient time to local governments undertake planning in accordance with provincial policies and realign their systems for improvements in service delivery and development in the province.
At the same time it will provide a system of accountability and rewarding performance so that capacity development support will be immediately made available under the DSP and PRMP TAs.
THE CM'S POLICY GRANTS (SECTOR GRANTS) According to new framework, sector grants will be designed in accordance with Chief Minister's policy priorities in a sector. To begin with, these grants will be created for a few sectors, one grant per sector. The sectors will include education, health, water and sanitation. Others will be added.
THE METHOD OF FINALISING THE SECTOR GRANTS WILL BE AS FOLLOWS:
1. Finance and P&D will indicate the size of grant.
2. Sector Department will propose variables relating to the sector to be used for crafting the distribution formula of the grant; these will be in accordance with policy directions of the Chief Minister.
3. The department will also attach a list of M&E arrangements to assess progress in the sector.
4. A statement of M&E systems in the sector will also be provided.
5. A proposal for improvements in the M&E systems to measure up to the needs of the proposed M&E arrangements will be included; (this proposal on approval will be taken up for implementation under the DSP and PRMP TAs).
6. Deliberations will take place with the local governments.
7. In light of the above, the grant formula, monitoring indicators and M&E system will be decided by the PFC Progress on the CM's policy; grants (sector grants) will be monitored by the concerned departments. Conditions on these grants will be such that they do not unnecessarily curtail local preference for service delivery. In light of this objective, the choice of variables should be such that they are not input indicators, but output indicators.
Sector grants will allow provincial secretaries to lay down policy precepts for the local governments in their sectors, at the same time ensuring that local governments have sufficient room to deliver improved services in accordance with local conditions.
To establish local finance on sound footings, official sources clarified that local government faced a hard budget constraint. Towards this end, the recurrent budget transformation to formula based shares is part of the grant system.
According to official sources, the transition will operate under the following guidelines:
1. Shares of local governments (District governments and TMAs) will be calculated under the general-purpose grant, in accordance with the formula. This will be the base share.
2. This share will be compared with the projected baseline share. The baseline share will be projected with 10 percent annual increase each year in accordance with MTBF assumptions.
3. The difference between the calculated share and projected baseline share will be either negative or positive for a local government. Each will be given a separate treatment in the transition period.
4. For all local governments, with calculated shares higher than the projected baseline shares, only a proportion of the gain will be passed on to them. The projected baseline share plus the proportion of the gain assigned to local government will be the actual share of the local government. This proportion will be determined on simulation of various options. The proportion will apply across the board and will rise with each succeeding year, such that it will ultimately rise to 100 percent. At the end of the transition period (3 years) the calculated share of the local government will be the actual share.
5. The proportions of the calculated shares, which are not passed on to the local government, will be placed in transition pools to help a smooth transition and undertake provincial priorities.
6. For local governments with calculated shares lower than the projected baseline shares, the deficiency will be made up from the transition pools. The deficiency will decrease due to a higher increase in revenue, and therefore, at the end of the transition, the additional assignment from the transition pool will phase out.
Simulations will be carried out by the PFC secretariat in the Finance Department and shares will be finalised prior to commencement of budget finalisation. The three-year calculated shares and transition grants will be worked out for each local government. They will be made available for medium term planning to local governments.
Beyond the transition period, general-purpose grant for the local governments will continue on formula basis.
The Punjab government also worked out a plan for implementation of the grant system, which will require that local governments and provincial departments are sufficiently informed and prepared. This will also ensure that the objectives of the grant system are adequately reaped and local government is placed on sufficient notice to deliver, in accordance with provincial policy priorities. This can be achieved with timely decisions and support from the Decentralisation Support Programme and Punjab Resource Management Programme, TA funds by donor agencies, including Asian Development Bank (ADB) and World Bank.
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