The provincial allocable amount is transferred to the local government broadly under two separate block grants, one for recurrent expenditures, which constitutes approximately 88% of the allocable amount, and the remainder for development expenditures, with no de jure discretion to local governments to re-allocate across these two windows.<sup>7</sup> The development grant — Rs.12 billion in 2006/07 — is distributed horizontally across the districts on the basis of a formula that gives equal weights to population and backwardness.

As Figure 5 shows, due to overall improved resource availability, transfers to local governments in Punjab have been increasing steadily at an annual rate of approximately 15% over the past five years, with growth rising to 18% and 22% in 2005/06 and 2006/07. In 2006/07, approximately Rs.100 billion was transferred to local governments, with districts receiving Rs.84 billion, TMAs Rs.12.7 billion, and Unions Rs.4 billion. Given that salary expenditures have increased at a lower rate, districts have been able to utilize some of the savings from the recurrent grants to fund development activities, despite the official earmarking of these transfers.

This fiscal space is unique to the districts of Punjab; however even here it is overshadowed by the provincial presence in the districts, particularly in the social sectors.

# <u>Transfers from the Provincial Retained</u>

<u>Amount: The province makes a number of</u> additional transfers to local governments from the provincial retained amount and outside the framework of the PFC. The most significant at the district level are the tied or conditional grants for education and health under the provincial Education Sector Reform Program (ESRP) and Health Sector Reform Program

**Figure 5: PFC transfers in Punjab**

<!-- Start of picture text --> PFC transfers to local governments (Rs. million)<br>120,000<br>100,000<br>80,000<br>60,000<br>40,000<br>20,000<br>0<br>2002/03 2003/04 2004/05 2005/06 2006/07<br>Districts TMAs Unions<br> Source : Govt. of Punjab (2007)<br><!-- End of picture text --> (HSRP) respectively, which are earmarked for the improvement of school and health facility infrastructure. These tied grants are distributed among the districts on a formula based on both need and performance. Additional funds for the social infrastructure improvement are also transferred to local accounts on a more ad hoc basis under the Chief Ministers Accelerated Program for Social Development (CMAPSD). The allocations in the provincial public sector development program for ESRP, HSRP, and CMAPSD (education and health components) in 2006/07 were Rs.5 billion, Rs.1.3 billion, and Rs.5.5 billion respectively.

An additional significant source of local development work is through federal vertical programs such as the Khushal Pakistan Program, the federal Education Sector Reforms (ESR), and the President’s Program for the Improvement of Watercourses. These funds are usually tied to certain pre-defined interventions, and are administered by the concerned DCO or EDO, usually through Personal Ledger Accounts held outside the provincial treasury, again with little or no involvement of the local political leadership.

> 7 To be precise, the 2.5% of the General Sales Tax is added to the Provincial Allocable and the total amount is transferred under four grants: a General Purpose Grant to meet current expenditures; an Equalization Grant to meet any shortfalls from the baseline expenditures after distribution of the General Purpose Grant; a Development Grant to meet development needs; and a Tied Grant to meet the social sector priorities of the provincial government.

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