Provincial Finance Commission - PFC

The Provincial Finance Commission is an apex body working under the jurisdiction of provincial government headed by its Provincial Minister of Finance. It has a special mandate to ascertain the share of available resources between provincial and local government, generally known as vertical distribution. It also formulates a criterion for distribution of allocated funds to local government horizontally among different tiers and local councils. This mechanism of distribution is known as Provincial Finance Commission (PFC) Award. To date, four PFC Awards have been designed and implemented in Sindh province. The first PFC Award was prepared in the year 2002 and implemented during 2002-03 and 2003-04. The second award was formulated in the year 2004 and implemented during the following two upcoming financial years. The third award was presented in the year 2006-07 for an interim period of one year. In the year 2007-08, the fourth award was designed and remained intact till the termination of local government in the year 2009.

These awards were primarily designed to focus on two broader objectives: (i) full coverage of recurring expenditures of local councils and (ii) to provide certain amount, over and above the recurring expenditures, for development purposes. The previous PFC awards were also proposed to distribute on the basis of multiple criteria that focus on fiscal needs, fiscal capacity, fiscal effort and performance of the local government. For different tiers of local governments, separate distribution formulae were developed, especially during the year 2007. The last PFC Award 2007 explained in detail as below:

PFC Award 2007

In the PFC Award of 2007, provincial divisible pool was estimated after deducting priority expenditures and OZT grant from federal transfers and grants and provincial tax revenues. The OZT in lieu of GST and amount of provincial allocable fund from divisible pool, which was 55% of the pool, was distributed among district government. This share of 55% was determined on the basis of obligations of district government as well as their salary expenditures. Amount of OZT transfer was Rs.21.2 billion and amount from divisible pool was accumulated to Rs.52.4 billion. Hence, total distribution to local government was Rs.73.6 billion

The provincial allocable amount was distributed among district governments on the basis of multiple criteria including fiscal need (55%), fiscal capacity (35%), and fiscal effort and performance (10%). Fiscal need comprises of population (40%), development needs (10%), and area (5%). Similarly, fiscal capacity is based on a composite index comprises of three indicators reflecting service infrastructure in health, education, and road sectors. Remaining 10% was proposed to allocate on the performance of district government. It was proposed that the performance based allocation will be made equally to all the districts in first year and a committee will propose indicators to allocate this amount in the subsequent years. However, this was never allocated on the basis of performance indicators rather given equally

The OZT grant was transferred among Taluka/Tehsil Municipal Administrations (TMAs) and Union Administrations (UAs). Each UA was given fixed transfer of Rs.2.4 million annually. Remaining amount of OZT was allocated among TMAs on the basis of multiple criteria including fiscal needs, fiscal capacity, and fiscal effort and performance. Fiscal need was determined on the basis of population (50%) and area (5%). Fiscal capacity was concluded on the basis of Human Development Index (HDI) with weight of (40%), composed of five indicators such as percentage of population without water, without electricity, having katcha, semi pacca housing, and percentage of illiterate population. The remaining 5% was proposed on the basis of performance indicator which was later given equally to all TMAs.

Awards

Article 160 of the Constitution of Islamic Republic of Pakistan authorizes the President of Pakistan to approve distribution of revenues between the federation and the provinces through an Order (the NFC Award), on the recommendation of the National Finance Commission (NFC).

The 7th NFC Award was signed on 30th December, 2009 and its recommendations were given legal cover with effect from 1st July, 2010, through President’s Order No.5 of 2010 (Distribution of Revenues and Grant-in-Aid Order,2010).

Clause 3(B) of Article 160 of the Constitution of Islamic Republic of Pakistan provides as follows:

“Federal Finance Minister and Provincial Finance Ministers shall monitor the implementation of the Award biannually and lay their report before both Houses of Majalis-e-Shoora (Parliament) and the Provincial Assemblies”.