The Local governments are hugely dependent on inter-governmental fiscal transfers. This degree of vertical imbalance can lead to inefficiencies in both the levels and quality of public expenditure.
In a joint study report, "Devolution in Pakistan", which was released recently by Asian Development Bank, Department for International Development (DFID) and Poverty Reduction and Economic Management Sector Unit, South Asia Region of World Bank, it was mentioned that the logic in both cases is that inter-governmental transfers lower the costs to local residents of getting services.
Arguably, the disconnection between expenditure and taxation encourages 'free-riding,' as well as reducing the incentives to monitor public expenditures, as resources are collected from distant taxpayers not likely to be using the services produced by the local government.
The district studies also revealed that local governments have limited autonomy in preparing their budgets. Vertical programmes are the main constraint on district and TMA autonomy in preparing the development budget with often the volume of funds channelled through vertical programmes dwarfing the district's own annual development plan (ADP) for particular sectors.
In the study of districts, more than half of the ADP is under the effective control of the federal and provincial agencies controlling the vertical programmes.
Local governments also have limited freedom in preparing the salary budget. Neither local nor provincial governments are able to determine pay scales, which are de-facto set at the federal level.
In Sindh and NWFP, districts must seek approval from the province for the release of funds from account (the provincial account) for their salary payments.
It is important to note that transfer has a precise meaning and refers to funds that are non-lapsing and within the re-appropriation authority of the district or TMA. In Punjab and Balochistan, the salary budget is transferred directly in District Account-4.
The study assumes that devolution would be providing district and tehsil nazims with greater incentives for efficiency in fiscal management if it achieved positive movement in three key categories; budgetary, autonomy and incentives.
The study revealed that the scorecard on the creation of provincial incentives for fiscal efficiency is mixed. On budgetary certainty, as the report shows, most funding for local government is in effect negotiated rather than formula-based.
All negotiated revenues provide opportunities for gamesmanship basing current policy decisions on their likely impact on future resource transfers, rather than their merits.
Less than 25 percent of all transfers mandated by the Local Government Ordinances (LGOs) are calculated on a formula basis.
Thus it is at least arguable that local revenues contain intrinsic incentives for efficiency, as local taxpayers might be more vigilant than distant ones and so efforts to improve own source revenues can imply incentives for efficiency. Incentives for local revenue effort are linked to the buoyancy and potency of taxes assigned to local government, and the clarity of such assignments.
Districts have been given rights to raise additional revenues, their tax base is weak, and some district taxes and user charges are very difficult to impose in practice.
In the six study districts Killa Saifullah, Karachi, Bannu, Bahawalpur, Khairpur, and Faisalabad for example, for 2003/04 own source tax revenues ranged from 0 percent to 8 percent of total revenues.
Therefore, even a large tax effort may bring only modest results in total revenue.
In addition, although the district and TMA taxes are clearly assigned in theory, administrative confusions in the collection arrangements blur the assignments in practice, further reducing incentives to increase collections. Administrative complexity is most clearly evident in the case of property tax.
The study argues that there are two necessary conditions for the local political leadership to have incentives for service delivery improvements. First, local councillors themselves must have an interest in serving the needs of their constituents and in particular the poor. Second, since the relationship between nazims and councillors is a critical intermediate step in the linkage to citizens as nazims are indirectly elected by councillors, nazims must find the pull from the councillors more demanding than the pull from other political powerbrokers, particularly the provincial governments.
On this basis, devolution has, on balance, created distinct incentives for nazims to listen to citizens. However, jurisdictional overlap makes it difficult for politicians to seek credit for improved services. When multiple levels of government are involved in delivering the same services, the public is unable to assign credit or blame effectively for that particular service to a particular politician. This overlap weakens incentives to perform well on service delivery and could encourage politicians to target services to their core supporters.
Jurisdictional overlap is particularly an issue in the education and health sectors, as federal and provincial vertical programmes remain principal tools in promoting national policy priorities and represent a significant proportion of local-government expenditures on service delivery.
The data suggests that there has not been a significant shift from large to small development schemes, or that councillors are abandoning existing schemes to gain political glory by starting new ones.
The importance of the political relationship between the nazim and the ruling provincial political coalition emerges strongly from the study. In two of the six districts visited, Bahawalpur and Faisalabad, the District Nazim is allied to the Chief Minister and the ruling provincial political coalition, while in the other four, the District Nazim is in opposition.
This relationship has a significant impact on the flow of funds between the province and local governments, on the implementation of local development schemes and on the manipulation of appointments and transfers of personnel. Effectively, the relationship with the province determines the extent of political control that the District Nazim can exercise within local government as well as the freedom local policymakers have to act to meet their constituents' demands.