# **V. Local government sectoral priorities**

This section attempts to uncover the political preferences of local policy-makers by analyzing the expenditure priorities of district governments. For such an exercise to make sense it is crucial that local policy-makers have significant discretion over the funds at their disposal. The analysis therefore focuses on Punjab as local governments are the least fiscally constrained in this province. The focus is also primarily on development expenditures as these are both politically the most visible of government activities and where preferences are most revealed, and also the budgetary area where the greatest element of discretion can be exercised by local policy-makers.

We will attempt to gauge political preferences by a) examining the sectoral composition of development expenditures as outlined in the Annual Development Plan (ADP), the budgetary document that provides this information; b) the average size and type of typical local development schemes; c) trends in non-salary recurrent expenditure to estimate the emphasis on operations and maintenance as opposed to new investments; and d) the relative size of provincial spending in the devolved sectors in a district. A main finding from this analysis is that provincial priorities in the devolved sectors have had a significant impact on local preferences, and appear to have encouraged districts to focus more on the physical infrastructure sectors.

A major caveat before proceeding is the limitation of fiscal data on local governments. Consolidated ADPs of local governments are not being compiled; each district prepares its ADP as per its own format, and these to date have not been consolidated by the provincial planning or local government departments. The analysis for this paper is based on ADP data for 2006/07 received from 33 of the 35 districts of Punjab. This is the first time to our knowledge that a consolidated profile of the district development portfolio has been prepared.

_Inter-governmental fiscal relations in Punjab_ Given their limited revenue base, local governments in Punjab are heavily dependent on intergovernmental transfers for their resources. The structure of inter-governmental fiscal relations is complex, with local governments receiving funds from a variety of sources over which they have varying degrees of discretion. These sources, as elaborated below, include transfers from the provincial and federal governments, as well as funds that are administered by local governments on behalf of the province and the federal government, in particular under the provincial Annual Development Program and federal and provincial vertical programs.

<u>The Provincial Allocable Amount: The formula-based transfers in Punjab, as in the rest of</u> Pakistan, are _de jure_ determined by the Provincial Finance Commission Award. Until 2006/07, these were annual, interim awards; the Punjab Specification and Distribution of Provincial Finances Order, 2006 provided the first three-year award covering the financial years 2006/07 to 2008/09. The Provincial Consolidated Fund (PCF) determines the resources to be divided up between the provincial and local governments, and consists of federal transfers and provincial revenues, with deductions made on account of pensions, debt servicing, and other liabilities of the local government. The Award divides the PCF into the Provincial Retained and the Provincial Allocable amount in the ratio of 58:42, the latter of which is transferred to the local governments into their account (Account 4). This ratio is determined on the basis of expenditure baselines of the province and local governments, taking into account the obligatory expenditures of the province.

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