'Fiscally autonomous local governments for better outcome' An interview with Muhammad Sabir, Principal Economist at Social Policy and Development Centre

The PTI government was voted in on an anti-status quo mandate, with a promise to transform the governance structure of the country. Among the many policies the party has floated to usher an era of transformation, its commitment to devolving power to local governments appears to be the strongest. The PM has already taken steps in this direction by abolishing MNA's discretionary funds, as he remains focused on the mantra of "localized development through local representatives".
BR Research recently sat down with Muhammad Sabir of Social Policy and Development Centre (SPDC) to discuss why a truly successful model of local governance has continued to elude us. Sabir is a Principal Economist and Unit Head in Public Finance Unit at SPDC and a visiting faculty member at Karachi University. His areas of interest span the fields of public finance, inter-governmental fiscal relations, consumer behaviour, country risk assessment, and macroeconomics. He is regularly published in national research publications including policy and conference papers, journals, newspaper articles and research reports.
In this interview, Sabir sheds light on the real issues ailing the tertiary level of government. The transcript is edited for clarity.
BR Research: The new federal government has renewed debate on local governance system with its proposal for a universal model across all provinces. In your view, what are the primary challenge currently facing local governing structures?
Muhammad Sabir: To answer your question, let us first recount the models of local governance implemented during the last three decades and their primary source of revenue and finance.
Until 1998, octroi/zilla tax used to be a major source of revenue, especially for Karachi. Similarly, under the law, urban property tax has always been an entitlement of local governments, which is currently collected by provincial governments and transferred/shared under an 80:20 formula between district authorities and provincial kitty, respectively. Of course, no local government can survive on municipal service charges or parking fees alone.
Later, under the Musharraf regime, Local Government Ordinance of 2001 mandated that inter-governmental fiscal relations be managed through Provincial Finance Commissions. At that time, several federal roles were devolved partially to local governments, such as primary healthcare and primary education. This created a severe need for finances at the local level, which was addressed through recalculation of formula for fiscal transfers under a Presidential Order.
The current system of local governments was formed under 18th constitutional amendment which wholly turned tertiary governance into a provincial chapter. The amendment to Article 140A of the constitution made each province responsible of devolving administrative and financial authority to local governments. This is where it gets complicated.
In India, local governments have a separate chapter under the constitution. While they are subservient to provincial authorities, the principal purposes, objectives, and responsibilities of local governments across different states remain the same.
BRR: Local governance systems currently in place obviously have their shortcomings, but why are different systems necessarily a problem, given the principle of devolution is not just restricted to administrative devolution but also legislative devolution?
MS: Take Punjab for instance. While primary education remains a local government subject, a provincial authority was set up which effectively micromanages district-wise education. Same is the case with healthcare. If the stated objective of creating local governments was to involve local political leadership with the administrative arm of the government, that has not been achieved.
More than 70 percent of the funds under PFC for education and healthcare in Punjab are allocated to the provincial authorities instead of district governments. Sindh is no different. Khyber Pakhtunkhwa introduced a comprehensive system; however, the provincial law does not give fiscal autonomy to local governments in KP either. Under the KP law, surplus revenue is retained by provincial government, instead of being earmarked as local government's savings.
Purely from the perspective of fiscal autonomy, this is a giant leap backwards from the progress made during 2000s. Resources earmarked by provinces for district governments are not necessarily a true reflection of the latter's needs. If local governments are given a right over their entitlements, they shall have the leverage to redefine their capacity and needs.
From a policy and governance perspective, this has become all the more urgent over the past 5 years. Pakistan's performance on SDGs for healthcare and education had improved when these subjects were devolved to local governments in 2000s. SDGs indicators have now begun to suffer ever since devolution was rolled back. There is a clear link between strong local government and education/health outcomes.
While PTI government's advocacy for local government reform is commendable, it appears to be largely restricted to administrative issues such as direct election of the mayor. Fundamentally, successful local government remains a question of resource allocation. This remains largely unaddressed, even by the so-called reformist camp.
BRR: But intergovernmental fiscal relations are addressed under the NFC award. Can amending the provincial legislation for local government address the issue of finance at all?
MS: Again, we need to look at the history. Under the 7th NFC award, octroi/zilla taxes were explicitly merged into provincial divisible tool. At that time, the federal government had increased GST by 2.5 percent. Under the scheme, incremental revenue from GST increase was to be allocated back to local government through fiscal transfers.
Unfortunately for local governments, funds collected under the increased GST were much higher than the revenue earned by districts under octroi and zilla tax. Federal government retained the excess funds and instead began an ad hoc grant. Even if we assume that the grants were sufficient, local governments' rightful share was withheld. Grants never lead to financial autonomy.
If we really want sustainable local government, the principles already set in the past need to be upheld. Foremost, one-sixth of the GST on goods needs to be allocated to the local governments from the divisible tool, as was decided under previous NFC awards. Second, provincial governments should fully devolve both urban immovable property tax and GST on services to local governments.
If these steps are taken, local governments will receive significant room for expenditure on public services. Research suggests that where local governments are financially self-sustainable, public scrutiny of municipal office holders increases as citizens are better able to hold locally elected representatives more accountable. Despite devolution, public continues to look towards boards and authorities established at provincial levels for the solution of their daily problems, whether it is solid waste management or urban water supply.
The beauty of local governments is in its inclusiveness. From union council, to TMA and district governments, the three-tiered layered structure of local governments allows general public outreach to public officeholders, without ever approaching a provincial authority to for problem resolution. An effective local governance system also addresses the bottlenecks of already overburdened government machinery.