Report No. 18432-PAK

PakistanPublic Expenditure Review:Reform Issues and OptionsOctober 7, 1998

Poverty Reduction and Economic ManagementSouth Asia Region

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CURRENCY EQUIVALENTS

Currency Unit Pakistan Rupee (Rs) at Official Exchange RateUS$1 25.895 1992/93

= 30.082 1993/9430.773 1994/9533.496 1995/96

= 38.894 1996/97= 43.145 1997/98= 46.115 (October 1998)

FISCAL YEAR (FY)

July 1 - June 30

Vice President: Mieko NishimizuCountry Director: Sadiq AhmedSector Manager: Roberto ZaghaTask Leader: Williamn Byrd

Acronyms

ABL Allied Bank of Pakistan LimitedADP Annual Development ProgramAG Accountant GeneralAGPR Accountant General Pakistan RevenuesAWBs Area Water BoardsBPS Basic Pay ScaleBOP Balance of PaymentsBOT Build, Operate, and TransferCAA Civil Aviation AuthorityCAR Comrnission on Administrative RestructuringCDL Cash Development LoanCDP Core Development ProgramCDWP Central Development Working PartyC&WD Communications and Works DepartmentDAO District Accounts OfficeDDWP District Development Working PartyECNEC Executive Committee of the National Economic CouncilFA Financial AdviserFAO Finance and Accounts OfficerFO Farmers' OrganizationFYP Five Year PlanGDP Gross Domestic ProductGHS Golden Handshake SchemeGOP Government of PakistanHBL Habib Bank LimitedIDC Interest During ConstructionIPPs Independent Power ProducersKESC Karachi Electricity Supply CorporationLBOD Left-Bank Outfall Drainage ProjectMNA Member of the National AssemblyMOF Ministry of FinanceMPA Member of Provincial AssemblyMTEF Medium-Term Expenditure FrameworkNBP National Bank of PakistanNDP National Drainage ProgramNFC National Finance CommissionNGOs Non-Governmental OrganizationsNHA National Highway AuthorityNWFP North West Frontier ProvinceO&M Operations and Maintenance

Acronyms (continued)

OECD Organization for Economic Cooperation and DevelopmentOGDC Oil and Gas Development CorporationPAC Public Accounts CommitteePAD Pakistan Audit DepartmentPC Privatization CommissionPDDs Provincial Development DepartmentsPDWPs Provincial Development Working PartiesPEs Public EnterprisesPEMS Public Expenditure Management SystemPER Public Expenditure ReviewPHE Public Health EngineeringPIA Pakistan International AirlinesPIDAs Provincial Irrigation and Drainage AuthoritiesPIEFRA Pakistan Improvement to Financial Reporting and AuditingPIPs Public Investment ProgramsPLA Personal Ledger AccountPR Pakistan RailwaysPSDP Public Sector Development ProgramPSM Pakistan Steel MillsPTCL Pakistan Telecommunication Corporation LimitedPWD Public Works DepartmentRWSS Rural Water Supply and SanitationSAP Social Action ProgramSBP State Bank of PakistanSNE Schedule of New ExpenditureSNGPL Sui Northern Gas Pipelines LimitedSSGC Sui Southern Gas Pipelines LimitedUBL United Bank LimitedUGC University Grants CommissionUPE Universal Primary EducationWAPDA Water and Power Development Authority

ABSTRACT

This Public Expenditure Review argues that Pakistan needs to change the way it allocates,manages, and spends public sector resources. Strict containment of total non-interest expendituresduring the next several years is required, as well as effective and sustained efforts to mobilizeadditional tax revenue. Otherwise the fiscal deficit will not be brought down to a sustainable level,the large build-up of government debt will continue, and interest payments (which together withdefense already consume nearly allfederal revenues) will progressively squeeze out other spending.Just as important, limited public sector resources need to be better allocated to serve the highest-priority needs of the nation, with effective utilization to minimize waste and inefficiency. Althoughthe government has made considerable progress in the past year and a half in containing andbeginning to reorient public expenditures, there are limits to short-term measures. The need forcomprehensive public expenditure reform has become even more urgent in view of the deteriorationin Pakistan's fiscal situation following its nuclear tests in May 1998 and subsequent imposition ofsanctions and related developments. Given Pakistan's fiscal problems and the need to continue tostabilize the economy, change is inevitable, but it would be far better for the country's developmentif the necessary changes are guided by appropriate reforms rather than occurring through collapseof over-extended public sector institutions and service delivery due to lack of resources.

The report puts forward a medium-term reform agenda with the following main elements:Rethinking the role of government at all levels to serve as the basis for restructuring public

expenditures.An integrated medium-term approach to planning and budgeting of public spending, based

on fiscal revenue projections over a multi-year horizon and including sector expenditure programswith integration of recurrent and development budgets - annual budgets and program allocationswould be consistent with the medium-term framework, and sustainable levels of recurrentexpenditures would determine sectoral investment programs rather than vice versa.

Effectively prioritizing among broad expenditure categories and programs, includingsharp increases in non-wage operations and maintenance spending in key sectors, higher spendingon basic social services, and an increase in public investment directed at high-priority projects,accompanied by containment/reduction of lower-priority expenditures.

Restructuring public sector institutions and service delivery for more effective managementand utilization of limited resources.

Decentralization of management of public sector activities to the provincial or local levelwhere appropriate, along with building capacity in local governments.

Civil service reform to develop a leaner, more effective civil service equipped with theneeded skills, facing an appropriate incentive structure, and better organized and managed, whosecost is in line with available fiscal resources and government objectives.

Greater accountability for public expenditures, both in the narrow sense of ensuring thatspending is for authorized purposes and avoiding irregularities, and in the broader sense ofaccountability for outputs and development impacts.

Strengthening monitoring and evaluation, based on better, timely information flows, withmeaningfulfeedback into subsequent public expenditure decisions.

These elements are closely inter-linked, so a coordinated approach to reform is required. Asis spelled out in the report, howeve,; it is possible to make significant progress in all of these areasin the short run through specific improvements, consistent with the overall direction of reform.

ACKNOWLEDGMENTS

This report is based on the findings of a World Bank rnission that visited Islamabad,Lahore, and Karachi during the period February 24 to March 25, 1997 and brief follow-up visits toQuetta (May 23-25) and Peshawar (May 29-30). The mission consisted of William Byrd(Principal Economist, SASPR, task team leader), Antoinette Sayeh (Senior Economist, SASPR,deputy task team leader); David Steedman (Senior Public Sector Specialist, AFTII), HanidMukhtar (Economist, SASPR), Muhammad Khan Niazi (Economist, SASPR), Auguste Tano-Kouame (Young Professional, SASPR), Stephen Lister (Consultant), Andrew Bird (Consultant),and Zafar Ismail (Consultant). Research assistance and data analysis support were provided byShaheen Malik (Economic Analyst, SASPR) and Aiza Aslam (Consultant), and processing of thereport was overseen and handled by Abdul Qadir (Principal Staff Assistant, SASPR). PeerReviewers for this study were Edgardo Ruggiero (IMF) and Jeffrey Hammer (DECRG). Thestudy was conducted under the overall supervision of Roberto Zagha (Sector Manager, SASPR)and Sadiq Ahmed (Country Director, SACPK). Useful comments and suggestions were providedby John Williamson (Chief Economist, SARVP), Shahrokh Fardoust (Economic Advisor,SASPR), and other participants in review meetings. Assistance from the Department forInternational Development of the UK government, which funded Messrs. Lister and Bird'scontributions to this task, is gratefully acknowledged.

In response to the government's request, a preliminary informal report was prepared at theend of the mission and presented to the government on March 25, 1997, and a revised version ofthe report was completed on April 17, 1997. Background papers on Public ExpenditureManagement and Public Investment subsequently were prepared and shared with the government.The Public Expenditure Review (PER) was distributed as a formal report on May 28, 1998 andwas discussed with the Federal Government on June 19, 1998. Comments received from thefederal and provincial governments have been taken into account in finalizing the PER. Whilerelying on the mission's findings and building on the informal report and background papers, thePER also includes updated information and analysis based on preliminary actual fiscal data for1996/97 and budget estimates for 1997/98. Chapter 4 on public sector employment, pay, and civilservice reform draws in part on the findings of a World Bank mission that visited Pakistan duringFebruary 7-26, 1998 to prepare a study on civil service reform.

This report would not have been possible without the support and cooperation ofnumerous officials of the Government of Pakistan and Governments of Punjab and Sindh, as wellas useful discussions with key officials in the Governments of NWFP and Balochistan. The PERalso relied on existing work by various government conmmittees and task forces as well as researchinstitutes and individual researchers in Pakistan. A notable example is the report of the TaskForce on Public Expenditure. The Federal Government counterpart team led by the JointSecretary, Expenditure, Ministry of Finance was instrumental in supporting the work of themission, and guidance was provided by the Deputy Chairman, Planning Commission, Secretary,Finance, and other senior officials in the Finance Ministry and Planning Commission. Themission also held very useful discussions with a number of other federal ministries/divisions. Atthe provincial level, officials of the Finance Departments and Planning and DevelopmentDepartments as well as other departments of the provincial governments of Punjab and Sindhcooperated closely with the mission. The assistance of all federal and provincial governmentagencies in providing the information required to prepare this report is gratefully acknowledged.

PAKISTAN:PUBLIC EXPENDITURE REVIEWREFORM ISSUES AND OPTIONS

Table of ContentsPaee No.

Executive Summary ................................................................ i

Chapter 1: Overview of Public Expenditure Structure, Trends, and Issues . ...................1The Setting ..................................................................... 1Structure and Trends of Public Expenditure ...................................................................... 2Key Issues ..................................................................... 5Reform Themes ..................................................................... 7

Chapter 2: Rethinking the Role of the State: Implications for Public Expenditure .............. 9Historical Background ..................................................................... 9Recent Developments ..................................................................... 10Approach to Reform ..................................................................... 12Public Enterprises and Privatization ..................................................................... 15Provincial Finances ..................................................................... 18

Chapter 3: Improving Public Expenditure Management ...................................................... 23Systemic Weaknesses ..................................................................... 23A Reform Strategy Based on a Medium-Term Expenditure Framework ...................................... 26Short-term Priorities ...................................................................... 31

Chapter 4: Toward a Lean, Effective Civil Service ............................................................... 34Trends in Public Sector Employment and Pay ..................................................................... 34Organization and Management of the Civil Service ..................................................................... 35Pay and Benefits ..................................................................... 37Lessons of Experience with Civil Service Reform ..................................................................... 38The Way Forward ..................................................................... 39

Chapter 5: Adequately Funding and Better Managing O&M . .............................................. 41Key Cross-cutting Issues ..................................................................... 41Sector-specific O&M Issues ..................................................................... 43Agenda for Reform ..................................................................... 46

Chapter 6: Streamlining Public Investment ............................................................... 47Structure and Trends of Public Investment ..................................................................... 47Planning and Management of Public Investment ..................................................................... 51Proposals for Reform ..................................................................... 54Short-term Actions ..................................................................... 56

Selected Bibliography

Statistical Appendix

List of Tables, Figures and Boxes

Tables:1.1 Consolidated Government Expenditures, 1984/85-1996/97 ....................................... 31.2 Expenditure on Social Action Program, 1992/93-1996/97 .......................................... 54.1 Structure of Government Employment .................................................................... 354.2 Establishment Cost of the Government, 1990/91 - 1995/96 ..................................... 365.1 O&M Allocations for Agricultural Research and Extension in Punjab Province ..... 445.2 Indicators of O&M Spending and Cost Recovery in Punjab and Sindh .................... 456.1 National Budgetary Public Sector Development Program 1990/91-1997/98 ............ 48

Figures:1.1 Sustainable and Actual Fiscal Deficits, 1980 - 1997 ................................................... 11.2 Composition of Consolidated Federal and Provincial Expenditure ............................ 42.1 Privatization Transactions and Sales Proceeds .......................................................... 172.2 Composition of Provincial Revenue and Current Expenditure ................................. 19

Boxes:2.1 Governance Problems in Pakistan .................................. ............................. 102.2 Criteria for Downsizing/Restructuring ............................................................... 122.3 The Golden Handshake Scheme for Federal Employees .....................................I ..... 142.4 The 1997 NFC Award ............................................................... 213.1 Permanent, Continuing, and New Expenditures ........................................................ 243.2 Role of Financial Advisers ............................................................... 253.3 Deficiencies in Accounts Classification and Reporting .................... ........................ 263.4 The SAP and Medium-Term Programming of Education Sector Expenditures ........ 303.5 The SAP and Medium-Term Programming of Health Sector Expenditures ............. 324.1 Planning for Civil Service Reform: Malaysia and Uganda ....................................... 386.1 Public Investment Programs - New Perspectives ....................................................... 476.2 New Infrastructure Projects ............................................................... 506.3 Government Guarantees to Private Infrastructure ...................................................... 516.4 The Link between Public Investment and Recurrent Expenditure ............................. 536.5 Sources of Project Monitoring Information in Pakistan ............................................. 546.6 Project Screening ............................................................... 55

EXECUTIVE SUMMARY

The Challenge

1. This Public Expenditure Review (PER) argues that Pakistan needs to change the way itallocates, manages, and spends public sector resources. The country has been facing a fiscal crisis- the culmination of adverse trends since the 1980s and worsening structural problems. Theconsolidated federal/provincial fiscal deficit of 6% of GDP or more in recent years and the overallpublic sector borrowing requirement of up to 8% of GDP are unsustainable. This large, persistent gapin the public sector's finances and consequent rapid build-up of public debt (85% of GDP in 1996/97,with annual interest costs of 6% of GDP) comprise the main factor behind Pakistan's recentmacroeconomic difficulties. Although the fiscal deficit was reduced somewhat in 1997/98, sustainingthis improvement and engineering the further deficit reductions required will not be easy. Moreover,the global environment has become more difficult following the East Asian crisis, and Pakistan's ownmacroeconomic outlook has deteriorated in the wake of the country's nuclear tests in May 1998,subsequent imposition of sanctions, and related weakening of confidence.

2. Budgetary revenues have not risen as a share of GDP despite sizable tax rate increases inprevious years. Although some progress has been made with tax reform (less reliance on trade taxesand more on direct taxes, value-added taxation at the import and manufacturing stages), revenuesremain too narrowly-based, with excessive taxation of imports, sizable firms, and salaried persons.Tax administration is weak and compromised by widespread corruption. The government has initiatedmeasures to lower tax rates, broaden the tax base (including imposition of agricultural income tax andextension of sales tax to retail commerce), and strengthen tax administration. These actions, however,will require sustained follow-through to generate significant revenues.

3. This report focuses on the expenditure side of the fiscal equation. While the rapid growth oftotal budgetary expenditures has moderated somewhat in the 1990s, structural imbalances haveworsened. Defense and interest now take up 70% of total federal expenditures (and pre-empt nearlyall federal tax revenues), while establishment costs (civil servants' salaries, benefits, and pensions),interest payments, and subsidies (mainly on wheat) account for the bulk of the provinces' expenditurebudgets. Development spending (previously the largest category) and non-wage operations andmaintenance (O&M) have been squeezed. Expenditures on basic social services, essential fordeveloping Pakistan's human capital, are still very low by international standards despite substantialincreases in recent years under the Social Action Program (SAP). The waste and ineffectiveness ofmuch public expenditure sharply reduces its development impact. Finally, the serious inefficienciesand financial problems of public enterprises are severely constraining their operational spending,lowering budget revenues, and generating large potential liabilities for the government.

4. During the past two years, the federal government has made substantial expenditurecutbacks, resulting in a one percentage point reduction in federal budgetary spending as a share ofGDP between 1995/96 and 1997/98 despite the rising interest burden. Development spending wasdrastically reduced by nearly 20% in October 1996, and the budgetary public sector developmentprogram (PSDP) in 1997/98 was slightly lower in nominal terms than actual spending in 1994/95, aconsiderable decline in real terms. Defense expenditure increased at a much lower rate than GDPbetween 1995/96 and 1997/98 and its ratio to GDP fell from 5.5% to 4.8%. Turning to the future,although government restructuring, use of privatization proceeds for debt retirement, and furthereconomization of defense spending (subject to security considerations) could provide modest

additional savings, the need to restore high-priority development-oriented expenditures means thatthere is limited scope for further reductions in total federal expenditures as a share of GDP.

5. The expenditure squeeze in Pakistan's four provinces has become even more severe thanat the federal level, seriously affecting their development programs and especially non-wage O&M.Although the provinces have taken some remedial measures (including attempts to freeze hiring andmodest staffing reductions through voluntary retirements), the structure of their budgets complicatesthe task of fiscal adjustment. Mobilizing more of their own resources (presently comprising about20% of total provincial receipts) is essential over the longer term but will have only a limited impacton the provinces' overall fiscal picture in the short run. Most potential savings on the expenditure sideare related to staffing adjustments (wages and pensions take up 70% of the provinces' non-interestrecurrent expenditures), which would take time and carry significant up-front costs. Moreover,adequate funding is needed for critical non-wage O&M and social sector spending. Therefore,significant further reductions in total provincial expenditures as a share of GDP will be difficultto achieve in the short run.

6. Developments since May 1998 have exacerbated Pakistan's immediate fiscal problems,leading to even greater pressures on expenditures. Revenue prospects in 1998/99 have worsenedas a result of lower projections of imports and GDP growth. Shortfalls in federal tax revenues willfurther constrain federal expenditures and also will translate almost directly into lower provincialspending given the provinces' very heavy dependence on federal tax transfers. The loss of a largeportion of expected external budgetary financing complicates the task of financing the fiscal deficit,and if suitable non-inflationary alternative sources of financing are not available, this may necessitateeven sharper cutbacks in expenditures.

7. In this highly constrained fiscal environment, Pakistan faces stark choices in reorienting itspublic expenditures. There is an urgent need to spend more on: (i) essential non-wage O&M in keysectors like drainage and irrigation and roads; (ii) basic social services, especially critical quality-enhancing expenditures (e.g. teaching materials, medicines); and, to the extent possible, (iii) publicinvestment in high-priority development projects (the budgetary PSDP has been halved as a share ofGDP during the 1990s). In the face of these demands, there is unfortunately little scope for a rise intotal budgetary expenditures as a share of GDP until tax reforms and administrative improvementsraise the tax-GDP ratio and create fiscal space for higher spending. This means that other, lower-priority expenditures will need to be substantially cut back, but the structural rigidities noted abovemake such reprioritization difficult - on the contrary, public investment and non-wage O&M haveborne the brunt of fiscal cutbacks in recent years. Nevertheless, it is essertial to economize onlower-priority expenditures in order to create space for high-priority spending.

8. The present situation presents a major challenge for Pakistan but also an opportunity forpublic expenditure reform that should not be missed. Reforms are urgently needed to (1) helpcontain the fiscal deficit in coming years; (2) allocate public funds to serve the highest-priority needsof the nation; and (3) improve the management of public expenditures so that limited resources areutilized with maximum effectiveness. Given Pakistan's fiscal problems and the need to continue tostabilize the economy, change is inevitable, but it would be far better for the country's development ifthe necessary changes are guided by appropriate reforms rather than occurring through collapse ofover-extended public sector institutions and service delivery due to lack of resources. In this context,the PER puts forward a medium-term reform agenda covering the following main topics:rethinking the role of the state and implications for public expenditure; improving public expendituremanagement; public sector employment, pay, and civil service reform; adequately funding and

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effectively managing O&M; and streamlining and improving public investment. This summarypresents the PER's main themes and findings.

Public Expenditure Reform: Overall Vision and Main Themes

9. Although the government has made considerable progress in containing and beginning toreorient public expenditures, there are limits to such short-term measures. Pakistan must go beyondmarginal changes and improvements; instead a comprehensive overhaul of public expenditurestructure, management, and institutions is required. This requires a well-thought out and multi-faceted reform strategy, whose main themes would include:

* Rethinking the role of government at all levels to serve as the basis for restructuring publicexpenditures. The recent effort by the Committee on Downsizing of the Federal Government tosystematically assess government departments and other public sector entities is promising butneeds to be taken further and integrated into regular budgetary decisionmaking.

* An inteurated medium-term approach to planning and budgeting of public spending, based onfiscal revenue projections over a multi-year horizon and including sector expenditure programswith integration of recurrent and development budgets. Annual budgets and program allocationswould be consistent with the medium-term framework, and sustainable levels of recurrentexpenditures would determine sectoral investment programs rather than vice versa.

* Effectively prioritizing among broad spending categories as well as programs and adjustingexpenditure allocations accordingly. This will require, within the constraints of a prudentmacroeconomic policy stance, sharp increases in essential non-wage O&M in key sectors, higherspending on basic social services, and an increase in public investment directed at high-priorityprojects. Lower-priority spending needs to be cut to make room for these increases.

* Restructuring public sector institutions and service delivery for more effective managementand utilization of limited resources. This will involve, among other actions, streamlining andrationalizing government agencies, capacity building, greater responsibility for line agencies withrespect to expenditures in their sectors, privatization of activities outside the proper domain of thepublic sector, and beneficiary participation and monitoring.

* Decentralization of management of public sector activities to the provincial or local levelwherever appropriate, in line with the provisions of Pakistan's Constitution. Past centralizationtrends have been harmful and need to be reversed. In the context of the envisioned restoration ofelected local governments, locally-oriented public sector functions and services should betransferred to them and their capacity built up.

* Civil service reform to develop a leaner, more effective civil service equipped with the neededskills, facing appropriate incentives, and better organized and managed, whose cost is in line withavailable fiscal resources and government objectives. Not just downsizing but a comprehensiveapproach is required, including changes in personnel and wage bill management; service rules;recruitment, transfer, and promotion practices; management structure; pay and incentives; pensionsystem; depoliticization of decisionmaking; etc.

* Greater accountability for public expenditures, both in the narrow sense of ensuring thatspending is for authorized purposes and avoiding irregularities and leakages, and in the broadersense of accountability for outputs and development impacts. This will require a whole range of

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measures, including strengthening and separating the auditing and accounting functions ofgovernment; preventing political interference in day-to-day expenditure decisionmaking; deterringand punishing corruption; inculcating a meaningful results orientation; decentralization and othermeasures to bring expenditure decisionmaking and management closer to beneficiaries; legalizingand enhancing the public's access to information on public expenditures; and promoting moreeffective reviews of public expenditures by the National and Provincial Assemblies.

* Strengthening monitoring and evaluation, based on better, timely information flows, withmeaningful feedback into subsequent decisionmaking. This will be critical for improving theprogramming, management, and effectiveness of public expenditures as well as accountability.

10. These broad reform themes translate into numerous specific recommendations, which areoutlined below and are covered in more detail in the PER main report.

Rethinking the Role of the State: Implications for Public Expenditure

11. Past growth of the public sector in Pakistan's economy was fueled by several agendas. Theobjectives of nation-building and promoting economic development have been pursued vigorously,superimposed on the earlier colonial system under which an elite civil service had been chargedprimarily with maintaining law and order and extracting a certain amount of revenue. The publicsector also took on the role of directly providing employment for the society. Public sectordecisionmaking has become politicized. Finally, public sector activities have become a source ofextra-legal financial flows through various forms of corruption, which is a symptom of the broadergovernance problems that adversely affect public sector performance. Together these objectives androles have resulted in a public sector that is overextended (in relation to capacity and availablefiscal resources), overstaffed at lower grades and skill levels, and inefficient. Funding andmanagement of essential government activities suffered, while the returns to public investment inmanufacturing, trade, and other peripheral activities were very low. Rather than stimulatingdevelopment, the public sector became a drag on the rest of the economy through supply constraints,high prices, and poor quality of products and services.

12. During the past decade or so there have been important changes in the role of the publicsector. Its involvement in manufacturing has greatly diminished; government controls over mostprices have been liberalized; the economy has been increasingly opened up to international trade andcapital flows; the private sector role in energy and infrastructure has expanded; and employmentgrowth in the public sector appears to have slowed down. Perhaps most important, fiscal resourceconstraints are now of overriding concern given Pakistan's difficult macroeconomic position, creatinga strong imperative for change in public expenditure. Until recently, however, these currents ofchange had barely begun to penetrate the core of the public sector's institutions and practices,and resource constraints did not translate into better prioritization of spending.

13. A thorough rethinking and redefinition of the role of government is needed to guide therestructuring of public expenditures. The government's Pakistan 2010 Vision Statement calls for"a new government, small but effective, decentralized, responsible, customer-oriented, and managedprofessionally." Rather than overextending itself in a very wide range of activities, the governmentshould become an effective facilitator and regulator for the private sector, focusing its directinvolvement on areas where the public sector role is essential. In addition to privatizing publicenterprises, the government should exit from departmental and other non-commercial activities thatare unnecessary or can be shifted to the private sector. The public sector has to stop acting as anemployment agency for the society, and staffing levels should become closely related to objectives and

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needs. Pakistan also cannot afford continuing micro-level political intervention in routine publicsector decisions. Instead of intervening in personnel decisions involving civil servants ranging downto school teachers and in initiation of even tiny development schemes, politicians should (as a group,in the appropriate fora of the national and provincial assemblies) make decisions about broad policyparameters and expenditure priorities. The elimination last year of the People's Program and similarprograms at the provincial level, under which allocations were provided to members of the nationaland provincial assemblies for sponsored local development projects, should reduce the scope formicro-level political intervention. The government has also announced that politicians' quotas forrecruitment into government service, places in educational institutions, and residential plots of land atbelow-market prices are being discontinued. These welcome reforms need to be sustained andpressures to weaken or reverse them resisted.

14. While phasing out the government's involvement in peripheral and inessential activities, thecore functions that should remain in the public sector need to be clariried. Well-known criteriarelated to market failure (public goods, so-called "merit goods", externalities) can be brought to bear,but it is also very important to ascertain whether the benefits of public sector intervention clearlyexceed the costs by a substantial margin. Another consideration is whether and over what timehorizon the private sector could be expected to handle the activities concerned. The critical objectiveof poverty reduction also can justify cost-effective and well-targeted government intervention.Finally, even if there is a clear justification for public sector involvement, this need not take the formof public sector provision of goods or services; alternatives include subsidization of private or NGOprovision, regulation, information provision, etc.

15. The federal-provincial-local aspect needs to be addressed in an integrated manner inrethinking the role of government. Since different levels of government have different comparativeadvantages with respect to various functions, it is important to specify the appropriate level ofgovernment to carry out each core public sector activity, with division of labor and avoidance ofexcessive duplication and overlap. Pakistan's Constitution, which clearly delineates the broadfunctions of the federal and provincial governments, provides a good foundation for such an effort.The disconnect between limited revenue mobilization and major expenditure responsibilities at lowerlevels of government also needs to be addressed.

16. Finally, the delineation of the appropriate role of government has a strong sectoraldimension. Public expenditures in each sector and major subsector should be critically assessed in thelight of sectoral objectives and the desired role of government. If this is done systematically,disconnects between existing sectoral expenditure patterns and sector development objectives andappropriate government roles will become apparent, and adjustments can be made. This approachforms an integral part of the reform agenda for public expenditure management discussed below.

Improving Public Expenditure Management

17. Pakistan's public expenditure management system (PEMS) has serious problems whichneed to be addressed through fundamental reforms. There are endemic pressures to overcommitresources, exacerbated by the approach to planning and budgeting. As a result, expenditure controlsare difficult to implement and carry a high cost in terms of inefficiency, while the system has hinderedrather than fostered the needed strategic reorientation of public expenditures. Measures to protect keyexpenditure categories (such as the Social Action Program) from general stringency may be helpfulbut only address the symptoms and risk overly constraining other spending. The incremental approachto budgeting recurrent expenditures means that the bulk of spending is carried forward by inertia. Inthe preparation of development budgets, line agencies' initial bids are not made in the context of clear

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resource constraints, and final decisions are made centrally and often in a fairly arbitrary manner.There are serious difficulties in implementing approved budgets. Budgeted funds are sometimesreleased late, in reduced amounts, or not at all. Pakistan's fiscal accounting system is antiquated, andthe Pakistan Audit Department (PAD) is compromised by its dual auditing and accounting functionsand by its financial and administrative dependence on the executive branch. There are manydeficiencies in information flows and a widespread lack of meaningful accountability.

18. To address these problems, a reform strategy based on a Medium-term ExpenditureFramework (MTEF) is advocated. The MTEF should be much more than merely a mechanicalextrapolation of expenditures over a multi-year period - it is a strategic policy and budgetaryframework within which line agencies are provided greater responsibility for resource allocationdecisions, with accountability for outcomes. It ensures that the annual budget exercise is influencedby longer-term development objectives instead of being dominated by short-term expediency. TheMTEF consists of a top-down resource envelope based on careful projections of fiscal revenues; abottom-up estimation of the current and medium-term costs of existing government policies andpublic sector activities; and, in the annual budget process, the matching of these costs with availableresources. An MTEF is particularly relevant for countries that need to restructure their publicexpenditures and aims to: (i) improve macroeconomic balance by developing a consistent and realisticresource framework; (ii) enhance the allocation of resources to strategic priority areas; (iii) increasecommitment to and predictability of policies and funding for better planning and sustainability ofprograms; and (iv) improve incentives by providing line agencies with hard budget constraints andgreater autonomy.

19. The MTEF approach needs to be adapted to conditions in Pakistan and requires actions ona broad front: (i) establishing the overall political and strategic framework for the MTEF to ensurepolitical buy-in and commitment; (ii) developing the macroeconomic framework for assessment ofavailable fiscal resources over a medium-term time horizon; (iii) systematic sector-by-sectorreconsideration of govemment roles and implications for sectoral programs; (iv) setting sectorresource envelopes for constrained and prioritized planning of public sector activities at the sectorlevel; (v) much closer integration between the recurrent budget and PSDP, with unified budgeting ofrecurrent and development expenditures; (vi) improving accounting, expenditure control, and relatedinformation flows; and (vii) promoting innovative and decentralized approaches to service deliverv,with beneficiary participation. Near-term preparatory measures would include capacity building fortechnical work on the medium-term fiscal framework and revenue projections; adjustments in theMTEF/budget process to ensure that there is appropriate political involvement in and commitment tothe determination of resource limits as well as broad objectives and policies; and a systematicreconsideration of the appropriate roles of government in each sector, comparison with currentgovernment activities, and drawing out of implications for sectoral programs. Other short-termmeasures to improve the PEMS, consistent with the MTEF approach, include:

* a thorough review of the recurrent expenditure implications of the existing pipeline ofdevelopment projects and the portfolio of projects under implementation;

* similarly (but over a longer time horizon) developing an inventory of existing public sector assetsand service networks to assess their full operating costs;

* integrating the budgeting of recurrent and development expenditures, initially within the budgetsof existing line agencies;

* improving the fiscal reporting system through computer-based accounting systems;

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* moving rapidly to separate auditing from accounting functions in PAD, and also rationalizing theinstitutional structure and methods of fiscal accounting in the provinces;

* developing an integrated framework for budgeting and management of foreign assistance;

* strengthening the accountability of line agencies for expenditure control within their authorizedappropriations; and

* measures to improve the information base, including collection of comprehensive public sectoremployment data, uniform compilation of budgetary expenditure data on economic classificationby all provinces, uniform classification of current and development spending, and creation of acomprehensive database for public enterprises.

20. The Social Action Program (SAP), initiated in 1992/93, represents the most importantinitiative so far in Pakistan to develop a programmatic medium-term approach to publicexpenditures at the sectoral level. The SAP is intended to substantially improve Pakistan's lowsocial indicators, which lag significantly behind the averages for low-income countries. Expansion ofaccess to and improvements in the quality and management of basic social services (elementaryeducation, basic health, rural water supply and sanitation, and population/family planning) have beenput at the top of the government's development agenda, and spending priorities have begun to shiftaccordingly. The SAP is based on five sets of program agreements developed by the federal andprovincial governments, in consultation with stakeholders and with the support of donors. Theseinclude (1) sector strategies; (2) policy reforms and progress indicators for each sector; (3) a five-yearrolling public expenditure plan; (4) planned expenditures, their financing, and procurement plans foreach subprogram; and (5) annual Operational Plans for each subprogram. The SAP can focus oncross-cutting problems that adversely affect the planning and implementation of social serviceprograms (e.g. governance) and includes a monitoring and evaluation component. While the SAP hasfaced implementation problems, the program design and operational mechanisms are broadlyconsistent with the MTEF approach.

21. Building on the experience with the SAP as well as sector-based expenditure programmingthat is being initiated in the agricultural and irrigation/drainage sectors (the latter through the NationalDrainage Program), sectoral pilots for the MTEF approach can be developed. Such sectoral initiativesneed to be carried out in the context of an overall fiscal resource envelope; hence it is essential also tomove forward with this part of the MTEF process in a timely manner.

Toward a Lean, Strong Civil Service

22. Although public sector employment in Pakistan (estimated at about 2.8 million - 1.9% of totalpopulation) is not high by international standards, its cost has been rising rapidly, and establishmentcosts (including pensions) now account for more than half of Pakistan's total non-defense, non-interest budgetary expenditures. Moreover, the very generous pension commutation provision,under which retiring civil servants take half of their pension in an undiscounted lump-sum paymentbased on life expectancy, will result in an explosion of pension costs in coming years if leftunchanged.

23. Even more important than economizing on costs is the need to improve the skills mix,incentives, and management of the civil service so that it can more effectively serve nationalobjectives. Pakistan's public sector employees are organized and managed largely along lines

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inherited from colonial times. The system is closed, rigid, hierarchical, and excessively centralized.Tensions between generalist and technical civil service cadres, and between bureaucrats andpoliticians, impede smooth and effective work. Incentives are lacking for effective performance, andseniority plays a predominant role. Accountability is weak, and there is widespread corruption,politicization, and demoralization. Providing employment in the public sector became a vehicle forpolitical patronage, resulting in an unfavorable skills mix. Job security has been guaranteed, althoughfrequent transfers of civil servants have detracted from the effectiveness of their work.

24. There is a widespread consensus on the need for change (including public concern), but muchless agreement on exactly what to do. Civil service reform is a complex and difficult task, wheremistakes are often made as a result of hurried and inadequately considered initiatives. This isdemonstrated by the experience of many countries including Pakistan. While the government rapidlyinitiated a downsizing exercise involving a review of the rationales for the existence and staffing ofgovernment agencies, the resulting recommendations were not implemented due to concerns about thelarge numbers of public sector employees that would be rendered redundant. Instead an untargeted,voluntary "Golden Handshake Scheme" (GHS) was promulgated in August 1997, under whichemployees could retire early with enhanced benefits. More than 80,000 persons responded to thisoffer, but due to its high up-front cost (estimated at over Rs 20 billion) and parliamentary and laboropposition, the GHS was shelved at least temporarily. A Commission on AdministrativeRestructuring is now looking at public sector reform issues in a more comprehensive manner.

25. Although the comprehensive approach to civil service reform is superior to piecemealmeasures, it requires a broad consensus, careful preparation/design work, and strong political will toimplement successfully. Specific reforms would encompass pay and benefits, pensions, personnelmanagement, recruitment practices, career and promotion patterns, rules of business, relationshipsamong different civil service cadres and between civil servants and politicians, decentralization,mechanisms to deter and punish corruption, broader substantive accountability to beneficiaries, andattitudinal changes, among others. While developing a comprehensive reform strategy and buildingconsensus, consistent progress can and should be made in the short run by stopping abuses andredressing irregularities. Success in these endeavors would strengthen the case for change.Recommended near-term actions include:

* Putting in place a complete, integrated management information system on public sectoremployment and personnel expenditures; carrying out provincial civil servants' censuses andpublishing the results of the 1997 federal civil servants' census.

* Maintaining and tightening recruitment freezes (except for front-line positions in SAP sectors and,on an exceptional basis, to obtain essential skills).

* Stopping new work-charged employment (which has been used to circumvent existingemployment bans and/or to make politically-motivated appointments).

* Terminating all ad hoc appointments and contractual appointments at the end of the contractperiod, with future contractual hiring to be only on the basis of specific terms of reference.

* Denotifying all unfilled posts which have remained vacant for more than one year.

* Stopping the automatic "move-over" of staff at the top of their grade into the next higher grade.

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* Doing payroll audits to remove ghost workers and pensioners, and strengthening payrolladministration through computerization and management improvements.

* Exploring options to limit the present open-ended health benefits for civil servants; monetizingsome allowances including personal petrol and telephones; phasing out official vehicles forpersonal use; and over time rationalizing the housing allowance.

* Restructuring the commutation provision in the civil service pension system to prevent anunmanageable surge in pension expenditures in the future.

26. The federal government is already beginning to implement some of these changes and iscommitted to others. The provinces also need to join this effort, since the bulk of governmentemployees are at the provincial and lower levels.

Adequately Funding and Better Managing O&M

27. Pakistan's spending on operations and maintenance (O&M - upkeep and repair ofcapital assets and the operational expenditures of service networks) has long been inadequate,especially non-wage O&M. Allocations for maintenance of national highways are estimated to coveronly one-third of needs. Similar shortfalls exist in other sectors. Moreover, much O&M funding ismisdirected or wasted. In agricultural research and extension, an estimated 90-95% of total recurrentexpenditures go to establishment costs, compared to the normative level of 40-60%. Despiteincreasing awareness of these problems, the situation has further deteriorated, for two main reasons:(1) existing institutions, incentives, and fiscal constraints militate against adequate budgeting,spending, and mobilization of resources for O&M and (2) institutional and other weaknesses reducethe effectiveness with which available O&M resources are utilized.

28. The lack of integration of the development and recurrent budgets has resulted in a bias againstadequate funding of O&M. New projects have driven budget preparation and were initiated withoutadequately providing for the recurrent expenditure needs of completed projects, resulting inoverextension of infrastructure and service networks in relation to financial capacity. Incrementalbudgeting of current spending makes it more difficult to minimize low-priority expenditures andthereby create fiscal space for essential O&M. The infrequent revision of maintenance yardsticks -which are meant to serve as the basis for budgeting O&M - results in grossly deficient budgetaryallocations. Incentives in the public sector also lead to underspending on O&M. Agencies cannot re-appropriate savings in their salary budget (including pay of O&M staff) to other uses. Receipts fromuser charges in most cases must be surrendered to the general treasury, dampening incentives toincrease cost recovery. As fiscal constraints have become tighter, limited resources for non-wageO&M are increasingly squeezed out by wage costs, as agencies cannot easily reduce employmentlevels. Moreover, initiation of new projects (with creation of new, albeit theoretically temporary,jobs) may appear more attractive to line agencies than adequate spending on non-wage O&M.

29. Weak institutional capacity, inefficiency, lack of accountability and market discipline, andgovernance problems reduce the impact of funds actually spent on O&M. Technical capacity islimited in the key federal and provincial maintenance agencies - yet line departments are generallyrequired to utilize their services rather than being allowed to contract out work to the private sector.Although resort to cost-effective private contractors (and community organizations) is becoming morecommon, the bulk of O&M services continue to be provided directly by the public sector.

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30. Medium-term solutions to the problems of O&M must be based on the reform of publicexpenditure management along the lines described above, which would rationalize O&M fundingand spending on the basis of affordable infrastructure and service network sizes. The private sectorshould become increasingly involved in carrying out maintenance work through transparentcontracting, and beneficiaries should be involved in decisionmaking and monitoring. In the short run,options for arresting the deterioration in O&M funding and achieving improvements include:

* Review and revise yardsticks for O&M requirements of specific sectors to ensure their accuracy,and regularly update them to take account of inflation. Such norms should be divided betweenwage and non-wage components, and budget allocations should be in accordance with thesenorms, with protection of the non-wage component. However, O&M norms should not be overlydetailed and should not build in high costs (e.g. by specifying rigid staffing requirements).

* Review existing public sector infrastructure and social service networks to assess theiraffordability in term-s of O&M funding. Where too large, they can be downsized to free funds foradequate, sustainable O&M of the remaining network. Institutional consolidation (e.g. inagricultural research) can accomplish the same objective.

* Encourage collection of user charges to (fully or partly) recover O&M costs; such proceeds shouldbe used to augment funding for O&M of the activities concerned.

* Where possible, turn over responsibility for O&M management and funding to user groups,beneficiary communities, or the private sector in order to strengthen accountability and introducesome degree of market discipline.

* Allow implementing agencies to re-appropriate from establishment costs for spending on O&M,while ensuring that legitimate personnel costs are adequately funded.

* Improve technical capacity at line agencies and promote efficient and cost-effective practices (e.g.contracting out maintenance activities rather than using force account).

Streamlining Public Investment

31. Pakistan's past development strategy emphasized public investment as a means ofstimulating economic growth. However, the country's Public Sector Development Program (PSDP)has been declining both in real terms and as a share of GDP, reflecting worsening fiscal constraints.Large numbers of new projects nevertheless have been added to the federal and provincialdevelopment programs in recent years, contributing to a huge "throw-forward" of project fundingcommitments for the future, amounting to 7.4 times the revised PSDP in 1996/97. A drastic 19%cutback in the federal PSDP was imposed in late 1996, which was on the whole well-prioritized. Atthe beginning of 1997/98 the government took major actions to rationalize the public investmentportfolio, including avoiding new projects almost entirely, dropping many small projects, reducing thethrow-forward by 27%, and eliminating politically-oriented programs like the People's Program.However, a number of large infrastructure projects are being initiated outside the normal planning andbudgeting framework, which would result in high direct and indirect (contingent) expenditureliabilities for the government if they are implemented.

32. Planning and management of Pakistan's development program need to be revamped.The lack of sectoral resource frameworks and the fragmentation of approval authority for projectshave resulted in a proliferation of smaller projects and overcommitment of the PSDP. The authority of

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line agencies to approve small public investment projects at the department level facilitatesfragmentation. A related problem is that certain sectoral entities (National Highway Authority, CivilAviation Authority, National Mass Transit Authority) have authority to approve even major projects intheir sectors - including projects carrying substantial direct and/or contingent fiscal liabilities -without going through the normal discipline of the Planning Commission's procedures. In budgeting,initial departmental submissions tend to far exceed the available funds. Hence much of the exercise isdevoted to reducing departmental development budgets to within the size limit for the PSDP as awhole, in a centralized and often rather arbitrary manner. Recurrent costs of projects tend to beunderestimated at time of project approval, and funding even of the estimated costs is highlyuncertain. Project implementation is adversely affected by (i) weaknesses in project design andpreparation, especially limited beneficiary participation and lack of government "ownership"; (ii)delays in project start-up; (iii) problems with project staffing and management; (iv) shortfalls anddelays in releases of budgeted funds; (v) delays in procurement and contracting; (vi) lack of attentionto the wider policy framework; and (vii) inadequate project supervision arrangements. Information formonitoring PSDP implementation suffers from delays, inconsistencies, lack of a sectoral focus,fragmentation, resource constraints, and inadequate monitoring capacity in line agencies.

33. As part of the broader reform of public expenditure management, six strategic measures havebeen identified to improve the quality and effectiveness of the PSDP in the face of continuing fundingconstraints. Advances have already been made in some areas, but further progress is needed.

* Reducing funding demands on the PSDP through accelerated and expanded privatization,promoting public/private partnerships where appropriate, and shedding inessential activities ofgovernment departments.

* Continuing to rationalize the portfolio of development projects, by discontinuing projects thatcannot be meaningfully funded (e.g. those that have received zero or "token" allocations for sometime), grouping smaller projects of a similar nature into broader sub-sectoral programs, regularlyreviewing projects on a sectoral basis, withdrawing the authority of lower-level bodies to approvesmall projects, and so on.

* A program framework for public investment, involving a stronger policy basis and outcomeorientation at the sectoral level along with medium-term sector resource ceilings; focus onprograms as opposed to individual investment projects; a two-step project approval process withinitial screening of proposals for inclusion in the PSDP prior to their detailedpreparation/appraisal; and better coordination between the federal PSDP and provincial ADPs.

* Improving project implementation performance, by strengthening project management andstaffing; ensuring timely flows of budgeted funds to projects; eliminating inappropriate proceduresand regulations which undermine the authority of project directors, contribute to implementationdelays, and lead to higher costs; and promoting stronger accountability for implementation.

* Strengthening monitoring and evaluation, by improving the structure and presentation of auditedexpenditure statements; strengthening project monitoring capacities in line agencies; revampingand strengthening the monitoring work of the Planning Commission; developing a program ofproject evaluations to be carried out each year; ensuring that the results of monitoring andevaluation are fed back into planning decisions; and improving the flow of expenditureinformation to monitoring agencies.

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* Institutional and planning cycle reforms including an enhanced role for line agencies in sectorpolicy and program development and greater focus by planning agencies on economic andfinancial analysis, medium-term forecasting and resource allocation, and monitoring andevaluation.

34. Short-term measures should build on the progress already achieved and should be consistentwith the reform directions outlined above. Recommended near-term actions include: (i) avoiding low-priority new infrastructure projects; (ii) carefully scrutinizing all proposals for new projects andapproving for inclusion in the PSDP only a small number of top-priority projects; (iii) abolishing tokenallocations and stopping projects that cannot be meaningfully funded; (iv) grouping small facility-specific projects into larger sub-sectoral programs; (v) re-introducing multi-year programming ofdevelopment expenditures; (vi) recruiting project directors on a competitive basis with renewable termcontracts; and (vii) minimizing delays in releases of budgeted project funds.

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1. OVERVIEW OF PUBLIC EXPENDITURE STRUCTURE,TRENDS, AND ISSUES

The Setting

1.01 Pakistan has been facing an ongoing fiscal crisis, which constitutes a serious threat tomacroeconomic stability and represents the culmination of adverse trends since the 1980s andworsening structural problems. The consolidated budget deficit of the federal and provincialgovernments has averaged about 7% of GDP during the past decade, while the broader publicsector deficit (including borrowing by four major public sector corporations) has beenconsiderably higher. Despite a significant reduction in 1993/94, the fiscal deficit has remainedwell above the sustainable level, i.e. the level at which the debt-to-GDP ratio would remain stable(see Figure 1.1). This large, persistent gap in the public sector's finances and resulting build-up ofpublic debt are the main factor behind Pakistan's current macroeconomic difficulties.

Figure 1.1: Sustainable and Actual Fiscal Deficits, 1980 - 1997\a

10%

9% -

8% \

7%

-- 5%

r 4%

3%

2%

1%

0%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

- - - Sustainable level of Fiscal Deficit Fiscal deficitlGDP

a\ The sustainable level of fiscal deficit is a level that can be financed without altering the ratio of public debt to GDP in the context of givenlevels of GDP growth, inflation and foreign and domestic interest rates. The broad definition of the fiscal deficit is used (including fourlarge public sector corporations).

Source: Pakistan 2010 Report.

1.02 Budgetary revenues have not risen significantly as a share of GDP despite large taxincreases on several occasions, staying at about 17% of GDP throughout the 1980s and 1990s.Although past reform efforts have reduced import duties and increased the share of direct taxes intotal receipts, revenues remain too narrowly-based, with excessive reliance on taxation of imports,sizable firns, and salaried individuals. Only a small proportion of the population pays income tax,and until recently agricultural incomes were not taxed at all. Small and medium-sized businesseslargely fall outside the tax net. Inability to raise the tax-GDP ratio (13% at present) reflects thelack of buoyancy of the tax system and serious weaknesses in tax administration.

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1.03 Driven by defense and interest payments, budgetary expenditures grew rapidly in the1980s, rising as a share of GDP from 23% to 26%. Although the pace of expenditure growth hasmoderated in the 1990s, structural imbalances have worsened. Interest and defense now accountfor 70% of total federal expenditure and pre-empt 95% of federal revenues. At the provinciallevel, establishment costs (salaries, benefits, and pensions of civil servants), which now accountfor over 56% of total spending, have increasingly crowded out high-priority development-orientedexpenditures. These rigidities have meant that the burden of fiscal adjustment has fallen primarilyon the development program and on non-wage O&M.

1.04 Developments since May 1998 have further exacerbated Pakistan's immediate fiscalproblems. Revenue prospects in 1998/99 have worsened as a result of considerably lowerprojections of imports and GDP growth. Shortfalls in federal tax revenues will further constrainfederal expenditures and also will translate almost directly into lower provincial expendituresgiven the provinces' very heavy dependence on federal transfers. The loss of a large portion ofexpected external budgetary financing complicates the task of financing the fiscal deficit, and ifsuitable non-inflationary alternative sources of financing are not available, this may necessitateeven sharper cutbacks in expenditures.

1.05 This report looks at issues and options related to public expenditure reform, includingrethinking the role of the state and implications for public spending (Chapter 2); improving publicexpenditure management (Chapter 3); public sector employment, pay, and civil service reform(Chapter 4); adequately funding and effectively managing O&M (Chapter 5); and streamlining andimproving public investment (Chapter 6). The rest of this chapter provides an overview of publicexpenditure trends and structure, summarizes the main issues, and outlines the reform agenda.

Structure and Trends of Public Expenditure

1.06 Pakistan's public sector consists of four main types of entities: (1) the federal government,which plays the dominant role in revenue mobilization and in non-development oriented currentexpenditures (mainly defense and interest) as well as funding most of the Public SectorDevelopment Program (PSDP); (2) the four provincial governments, which account for the lion'sshare of development-oriented current expenditures and the government adrninistrative apparatusand employment;1 (3) local government bodies, which have limited autonomy and whose functionshave been increasingly centralized under provincial control; and (4) public enterprises, which areinvolved in a broad range of economic activities and dominate key energy and infrastructuresectors as well as finance. Comprehensive information is not available about the spending of localbodies, much of which is incorporated into provincial expenditure figures.

1.07 Total consolidated federal and provincial budgetary spending remained roughly constant asa share of GDP from the late 1980s until the early 1990s, before declining significantly in 1993/94and subsequently. Growth of federal expenditure slowed down sharply (from 15% per year innominal terms in the mid- to late-1980s to only 9% per year in the 1990s), whereas the

I Three jurisdictions are directly administered by the federal government - the Federally Administered Tribal Areas(FATA), Federally Administered Northern Areas (FANA), and Islamabad Capital Territory (ICT) - and Azad Jammuand Kashmir (AJK) has a quasi-independent status but its expenditures are covered by the federal budget.

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deceleration of provincial expenditure was much less pronounced (from 14.5% to 11.5%). Theslowdown in expenditure growth, however, did not succeed in bringing the fiscal deficit down to asustainable level. Reflecting the generosity of the 1991 National Finance Commission (NFC)Award, provincial expenditures have been increasing at a somewhat faster rate than federalexpenditures, although there has been variation among provinces.

1.08 Current expenditure, although it declined as a percentage of GDP from a peak of 20.3% in1992/93 to 18.3% in 1996/97 (see Table 1.1), has maintained a high nominal rate of growth ofabout 15% per year. Defense spending declined from its peak level of 7.2% of GDP in 1986/87 to5.2% in 1996/97 and an estimated 4.8% of GDP in 1997/98, whereas interest payments havegrown by 20% per year since the mid- 1980s and doubled their share in total expenditures from14% in 1984/85 to 28% in 1996/97 (Figure 1.2) and a budgeted 31% in 1997/98. Expenditures ongeneral administration increased at about the same rate as GDP in the 1980s, but owing tosubstantial increases in salaries and, at least in the case of Sindh, in the number of governmentemployees, as well as higher overheads due to subdivision of existing administrative units, thiscategory of expenditure has grown rapidly by 21% p.a. in the 1990s.

Table 1.1: Consolidated Government Expenditures, 1984/85-1996/97(Percent of GDP)

1984/85 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97(Actual) (Actual) (Actual) (Actual) (Actual) (Actual) (Actual) (Prov.) (Rev.)

Total Expenditure 24.7 25.9 25.6 26.5 26.0 23.2 22.7 23.9 21.5Federal 19.1 20.2 19.7 20.4 19.6 17.5 16.7 17.8 15.8Provincial 5.6 5.7 5.9 6.2 6.3 5.8 6.0 6.1 5.7

Development 7.0 6.5 6.4 7.5 5.7 4.5 4.4 4.3 3.2Federal 5.4 5.1 5.0 5.9 4.0 3.2 3.1 3.2 2.1Provincial 1.6 1.5 1.4 1.6 1.6 1.4 1.3 1.2 1.1

Current 17.7 19.3 19.2 19.0 20.3 18.7 18.4 19.5 18.3Federal 13.7 15.2 14.8 14.4 15.6 14.3 13.6 14.6 13.7Provincial 4.0 4.2 4.4 4.5 4.7 4.4 4.8 5.0 4.6

Defense 6.7 6.9 6.3 6.3 6.5 5.8 5.6 5.5 5.1Interest 3.5 5.5 4.9 5.2 5.9 5.8 5.2 6.1 6.0Subsidies 1.1 1.1 1.1 0.7 0.5 0.3 0.3 0.5 0.5General 1.4 1.4 1.3 1.5 1.5 1.6 1.8 2.2 1.7AdministrationSocial Services 2.2 2.4 2.8 2.7 2.8 2.6 2.6 2.5 2.6Others 2.7 2.2 2.8 2.7 3.1 2.5 2.9 2.7 2.4

Source: Ministry of Finance.

1.09 Continual incurring of unsustainable fiscal deficits has resulted in a sharp increase inPakistan's public debt. The stock of government debt in 1996/97 amounted to Rs 2.1 trillion (85%of GDP), divided almost equally between foreign (44%) and domestic (41%) debt. The annualrate of increase of domestic debt over the past 16 years (20%) has been significantly faster thanthat of foreign debt (16%). However, the former has been decelerating over time, while the latterhas accelerated. Foreign debt, which in 1996/97 totaled US$ 28.4 billion (not including foreigncurrency deposits), has been growing at only 6.3% per year in dollar terms, but the pace of increasehas been faster in the 1990s (10% per year) than in the mid- to late-1980s (3% per year).

1.10 As a result of the Social Action Program (SAP), spending on social sectors has increasedrapidly by 18% per year in the 1990s, with expenditures on the basic services included in the SAP

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(elementary education, basic health, population welfare, and rural water supply and sanitation)growing by 25% per year (see Table 1.2). This momentum could not be maintained in 1997/98,however, when in the face of worsening fiscal constraints, SAP spending by the provinces fellshort of targets.

1.11 Pakistan has a sizable public enterprise sector, which for the most part is not reflected inthe budgetary statistics. Although the role of public enterprises (PEs) in production of goods andservices has declined markedly with the privatization of many industrial units, PEs continue toplay a dominant role in infrastructure, energy, telecommunications, and financial services. Thereare now about 110 PEs at the federal level (down from over 200 in early 1990s), with totalemployment of 620,000. The eight largest public sector corporations account for 70% of totalemployment in the PE sector. 2 Corporations at the provincial level, though large in number, areinsignificant in terms of levels of employment and resource use.

Figure 1.2: Composition of Consolidated Federal and Provincial Expenditure

1990/91 1996/97Others Others

General 15% Defense 13% Defense

Admin ~~~~~~~~~~~Admin5% 8%

Development16%

Development Itrs25% 19%ntrs

Social Social 28%

Sectors Sectors

11% 12%

Source: Ministry of Finance.

1.12 Although many large PEs are public monopolies - operating mostly in protected markets,getting special treatment in tax and labor laws, and utilizing subsidized inputs - they have onlylimited autonomy to set their prices or levels of operation. Moreover, these enterprises have beenused to further the government's "social employment" policy, as a result of which most of themare heavily overstaffed. As the current expenditure of seven major PEs3 increased at an averageannual rate of 23% during 1992/93-1996/97, the level of self-financing of their developmentexpenditures from their operating surpluses fell from 2.2% of GDP in 1992/93 to only 0.7% in1996/97. Despite a drastic decline in their development program from 4.2% to 2.9% of GDP, their

2These include the Water and Power Development Authority (WAPDA), Pakistan Railways (PR), PakistanTelecommunication Company Limited (PTCL), Habib Bank Limited (HBL), United Bank Limited (UBL),National Bank of Pakistan (NBP), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM).

3These include PR, WAPDA, the Karachi Electric Supply Corporation (KESC), Sui Northern Gas Pipelines Ltd.(SNGPL), Sui Southern Gas Company (SSGC), the Pakistan Telecommunication Company Ltd. (PTCL), and the Oiland Gas Development Corporation (OGDC).

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overall deficit increased to Rs 53 billion (2.2% of GDP) in 1996/97. The financial problems ofkey PEs appear to have further worsened during 1997/98.

Table 1.2: Expenditure on Social Action Program, 1992/93-1996/97(Rs Million)

Average1992/93 1993/94 1994/95 1995/96 1996/97 AnnualActual Actual Actual Prov. Revised Growth

Total Expenditures 24,263 28,679 37,829 43,691 52,428 21.2Development Expenditures 8,055 9,388 13,248 13,345 18,091 22.4

Rupee 5,155 5,888 8,848 10,145 11,975 23.5Foreign Assistance 2,900 3,500 4,400 3,200 6J116 20.5

Current Expenditures 16,208 19,291 24,581 30,346 34,337 20.6Salary 14,880 17,555 20,939 26,240 29,573 18.7Non-Salary 1,328 1,736 3,642 4,106 4,764 37.6

Provincial: 19,895 23,995 32,269 38,069 47,609 24.4Federal: 4,368 4,684 5,560 5,622 4,819 2.5

Total SAP Expenditure as a percent of GDP 1.8 1.8 2.0 2.0 2.1 --

Source: Social Action Program Operational Plans and Budget Documents.

Key Issues

1.13 As discussed above, Pakistan's large, unsustainable fiscal deficit is the main threat tomacroeconomic stability and has to be reduced to a sustainable level. This will require effectiveand sustained efforts to mobilize additional tax revenue, as well as strict containment and betterprioritization of public expenditures. Public debt and the associated interest burden on the budgetmust be stabilized as a share of GDP and then gradually reduced. Although some progress wasmade in reducing the fiscal deficit in 1997/98, sustaining this improvement and engineering thefurther deficit reductions required will be very difficult, particularly in the much more problematicmacroeconomic and external situation Pakistan faces following the country's nuclear tests in May1998, subsequent imposition of sanctions, and related weakening of confidence. The poorfinancial performance of key public enterprises and associated fiscal liabilities constitute anotherserious macroeconomic problem which urgently needs to be addressed.

1.14 Structural rigidities severely constrain fiscal adjustment on the expenditure side. Afterinterest, defense, and establishment costs are covered - they comprise 70% of total federalbudgetary spending and also a large proportion of total provincial expenditures - all that is left toreduce if cutbacks are required in the short run is development and non-wage O&M. While someinappropriate and lower-priority activities have been dropped from the development program,high-priority projects and programs also have been seriously affected. Similarly, establishmentcosts have increasingly crowded out already inadequate non-wage O&M. Continuation of presenttrends would result in a worsening impasse, with the bulk of public expenditure pre-empted byinterest payments, defense, and establishment costs.

1.15 Weaknesses in the programming and budgeting of public expenditures adversely affectprioritization and effectiveness. A programmatic perspective is usually missing, partly because ofthe sharp demarcation between development and recurrent spending. Public investment planningis focused on projects rather than on sectoral objectives and programs, and incremental budgetingof current expenditures is the norm. The approach is procedure-driven rather than results-oriented

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and tends to preserve or exacerbate existing structural rigidities. There is a built-in bias in favor ofprotecting establishment costs at the expense of non-wage O&M.

1.16 Public expenditures in Pakistan also suffer from serious problems in implementation,monitoring, and evaluation. Releases of funds for development projects have been delayed andinadequate in times of fiscal stress. Expenditure controls, though effective in containing spending,have tended to be mechanically applied and not adequately prioritized. Routine decisionmaking iscentralized in bureaucratic hierarchies. Monitoring and evaluation have not been assigned theirdue importance, and the foundations for effective monitoring and evaluation - adequate, timelyflows of information, an autonomous institutional framework, adequate resources, and feedbackinto subsequent expenditure decisionmaking - are largely missing. Accounting and auditing sufferfrom limited capacity and lack of institutional autonomy for the latter, among other problems.

1.17 Governance problems impair the effectiveness of public expenditures. Politicization ofroutine decisionmaking has weakened the civil service and has diverted expenditures to lower-priority activities. Corruption has resulted in sizable leakages and has compromised many publicsector activities. Government procurement and contracting, in particular, are vulnerable togovernance problems, and elaborate procedures designed to prevent corruption may result inmechanical decisionmaking and delays. More generally, there is a pervasive lack of accountabilitythroughout the public expenditure management system.

1.18 Institutional weaknesses complicate public expenditure management and reduce theeffectiveness of public spending. Although well-established and adequately staffed in general, thecore agencies (Planning and Finance) lack technical capacity in some areas and arecompartmentalized. The line agencies lack the capacity and orientation to take a sectoral andprogrammatic approach to expenditure decisionmaking. Regulatory institutions for the privatesector are underdeveloped, particularly in areas where public sector monopolies are opening up toprivate investment (e.g. power and infrastructure).

1.19 Progressive centralization of public expenditure decisionmaking and management hasoccurred over the past several decades, involving both provincial encroachment on localgovernment functions and increasing federal involvement in activities previously handled by theprovinces. Examples include primary education, health, and agriculture, among others. Thisreflects bureaucratic behavior (e.g. by the centralized elite civil service) as well as politicalpressures. The atrophy of local government institutions has adversely affected the delivery ofmany localized public services.

1.20 As a result of these problems, there is widespread dissatisfaction with the public sector inPakistan. A striking manifestation is exit by the population from public sector institutions.Parents, even the urban poor who can ill-afford to do so, send their children to private schoolswhen they are available. Public sector health facilities are severely underutilized because people atall income levels prefer to use private practitioners. The shift in the composition of domesticfreight away from the railways to private road haulage is another manifestation of dissatisfaction.Those who can afford it do not rely on the police but instead make private security arrangements(which are very widespread). Conflict resolution and handling of criminal matters often bypasslaw enforcement and judicial channels. Rural communities are increasingly relying on their ownefforts to develop local village infrastructure and social services. Although greater reliance on

7

community/NGO and private efforts is generally a positive development, when this occurs in thecore areas of responsibility of the public sector it is a worrisome sign of disillusionment.

1.21 While exit is essentially a passive strategy, various segments of the population are alsomaking known their dissatisfaction in more active ways. Civil unrest is an extreme response toperceived inability of the public sector to fulfill its responsibilities (e.g. in relation to lawenforcement cases). More generally, as noted in the government's Pakistan 2010 Vision Statementwith respect to public dissatisfaction with corruption, "The resulting social frustration feeds uponand encourages civic violence, generalized dysfunctional behavior, and involvement in criminal orterrorist activities." The lack of credibility of complaint mechanisms and other official modes ofrecourse encourages extra-legal responses to the inadequacies of the public sector.

Reform Themes

1.22 These problems clearly demonstrate the critical need for reform, (1) to help contain thefiscal deficit, (2) to allocate public spending to serve the highest-priority needs of the nation, and(3) to improve the management of public expenditures so that limited resources are utilized withmaximum effectiveness. Key themes of public expenditure reform include:

* A thorough rethinking of the role of govemment at macro, sectoral, and micro levels, to serveas the basis for restructuring public expenditures. The recent effort by the Committee onDownsizing of the Federal Government to systematically review the roles of governmentdepartments and other public sector entities is promising but needs to be taken further andintegrated into regular budgetary decisionmaking, with a sectoral focus.

* An integrated medium-term approach to planning and budgeting of public spending, based onfiscal revenue projections over a multi-year horizon and including sector expenditure programswith integration of recurrent and development budgets. Annual budget allocations would beconsistent with the medium-term framework, and sustainable levels of recurrent expenditureswould deterrnine sectoral investment programs rather than vice versa. Budget categories andstatistics would need to be improved and made consistent with this approach.

* Effectively prioritizing among broad spending categories as well as programs and adjustingexpenditure allocations accordingly. This will require, within the constraints of a prudentmacroeconomic policy stance, sharp increases in essential non-wage O&M in key sectors,higher spending on basic social services, and an increase in public investment directed at high-priority projects. Lower-priority spending needs to be contained and where possible reduced.

* Restructuring public sector institutions and service delivery to ensure that limited resources aremanaged and utilized effectively. This will involve, inter alia, streamlining and rationalizinggovernment agencies; greater responsibility for line agencies related to expenditures in theirsectors; capacity building to enable public sector institutions to better fulfill their roles;privatization of activities outside the proper domain of the public sector, with effectiveregulatory frameworks and institutions; and beneficiary participation and monitoring.

* Decentralization of management of local/regional infrastructure and public services to theprovincial or local level where appropriate, in line with the existing provisions of Pakistan'sConstitution. This will bring such activities closer to the beneficiaries, which will also

8

promote accountability and, in many cases, encourage resource mobilization to help cover thecosts. The provincial and especially the federal governments should play the role offacilitators and regulators rather than direct providers of services. In the context of theenvisioned restoration of elected local governments, public sector functions and services of alocalized nature should be transferred to them and their capacity built up.

* Civil service reform to develop a leaner, more effective civil service equipped with the neededskills, facing an appropriate incentive structure, and better organized and managed, whose costis in line with available fiscal resources and government objectives. Not just downsizing butrather a comprehensive approach is required, including changes in service rules, personnelmanagement and information systems, organizational structure, pay and incentives, pensionsystem, and depoliticization of decisionmaking, among others.

* Greater accountability for public expenditures throughout the system, both in the narrow senseof ensuring that spending is for authorized purposes and avoiding irregularities and leakages,and in the broader sense of accountability for outputs and development impacts. This willrequire a range of measures, including strengthening and separating auditing and accountingfunctions of government; preventing political interference in day-to-day public expendituredecisionmaking; deterring and punishing corruption at all levels; inculcating a meaningfulresults orientation into public expenditure management; bringing public expendituredecisionmaking and management closer to beneficiaries; legalizing and enhancing the public'saccess to information on public spending; and promoting more effective reviews of publicexpenditures by the National and Provincial Assemblies as well as transparent involvement ofthe cabinets and legislatures in setting broad budgetary directions and priorities.

* Strengthening monitoring and evaluation, based on better, timely information flows, withmeaningful feedback into subsequent public expenditure decisions. This will be critical forimproving the programming, management, and effectiveness of public expenditures as well asfacilitating greater accountability.

1.23 These broad themes of public expenditure reform translate into numerous specificrecommendations for institutional, policy, and procedural changes, which are elaborated insubsequent chapters.

9

2. RETHINKING THE ROLE OF THE STATE:IMPLICATIONS FOR PUBLIC EXPENDITURE

2.01 A thorough rethinking of the role of the state forms the heart of public expenditure reform.This chapter reviews the historical background and recent changes, then sketches out a strategy forreform. In view of their roles as instruments of state intervention, serious financial problems withmacroeconomic consequences, and inefficiencies which affect the rest of the economy, a section isdevoted to public enterprises and privatization. A review of provincial finances also is included,since the provinces will play a critical role in the needed reorientation of government.

Historical Background

2.02 Growth of the public sector in Pakistan has been fueled by several agendas. The objectivesof nation-building and promoting economic development by direct (public investment, creation ofpublic enterprises, public provision of services, etc.) and indirect (tax incentives, subsidies,directed credit, regulatory restrictions) means have been pursued vigorously for a number ofdecades. These roles have been superimposed on the earlier colonial system, under which an elitecivil service was charged with maintaining law and order and extracting a certain amount ofrevenue. The public sector has also taken on the role of directly providing employment for thesociety and hence has become geared toward expanding/protecting public sector employment, pay,and benefits. Public sector decisionmaking has become politicized, not only in terms of broaderpolicy directions, strategies, and funding - a normal political role - but also in routine decisionsrelating to project and site selection, staff recruitment and transfers, contracting and procurement,etc. Finally, public sector activities have become a source of extra-legal financial flows throughvarious forms of corruption, a symptom of the broader governance problems that adversely affectthe performance of the public sector (see Box 2.1). Together these objectives and roles haveresulted in a public sector that is large and overextended (both in relation to available resourcesand in its involvement in activities better handled by the private sector), overstaffed at lowergrades and skill levels, and inefficient.

2.03 There have been important changes in the role of the public sector during the past decade.Its direct involvement in manufacturing has greatly diminished as a result of privatization andderegulation. The economy has been increasingly opened up to international trade and capitalflows. The private sector role in energy and infrastructure has sharply expanded. Employmentgrowth in the public sector appears to have slowed down, and it has become widely recognizedthat the public sector can no longer serve as an employment agency for the society. Perhaps mostimportant, fiscal resource constraints have become of overriding concern due to the difficultmacroeconomic situation, which creates a strong imperative for change in public expenditure.

2.04 Until recently, however, these currents of change had barely begun to penetrate the core ofthe public sector's institutions and practices. Incremental budgeting, a major constraint toexpenditure restructuring, has continued. Establishment costs are protected at the expense of otherexpenditures, and there have been few changes in rigid personnel practices or in abuses in thisfield. Politicization of routine decisions has continued. And progress in shedding governmentliabilities - public enterprises, unnecessary departments and bodies, etc. - has been slow.

10

Tightening resource constraints until recently did not result in better prioritization of publicexpenditures.

Box 2.1: Governance Problems in PakistanIssues related to governance have received increasing attention in Pakistan. The government's recent

Pakistan 2010 Vision Statement (presented to the nation on February 10, 1998) provides the following summary ofgovernance problems in the country:

"The crisis of governance has many features. At the most dramatic level is the breakdown of law and order,threatening the very life and livelihood of citizens, because of crime, civic conflict, terror, and widespread corruptionand inefficiency. A related contributory factor is the loss of public control over major state institutions (especially thepolice and security agencies), and in some cases even the criminalization of the latter.

A second major issue is that of corruption that pervades all three branches of government: the executive, thelegislature, and the judiciary. The result is that none of the three branches acts as a check upon the misfeasance of theother two. The powers to appoint or reward public officials are used arbitrarily, public property is handled in cavalierfashion, the system ignores (and often rewards) financial corruption and the misuse of powers, financial institutionshave been burdened with unserviceable loans, public lands have been doled out in return for political or financialfavors, and publicly controlled institutions are badly managed and respond neither to citizen needs nor to financialimperatives. The resulting social frustration feeds upon and encourages civic violence, generalized dysfunctionalbehavior, and involvement in criminal or terrorist activities.

A third issue is policy ineffectiveness, including for example the inability to raise revenues for thegovernment, target policies to selected groups or regions, ensure that governmental assets are used and maintainedefficiently, provide social services of adequate quality to citizens, regulate or monitor potentially hazardous economicactivities, or generally protect the lives and livelihood of citizens. This inability results in a widening gap betweenannouncements and results, and leads to an erosion of confidence in the government. Indeed, the greater theineffectiveness, the higher is the propensity to make grandiose announcements.

Finally, as already mentioned, ad hoc policy making contributes directly to economic instability andunpredictability, discouraging long-term investment, and encouraging lobbying and influence peddling.

The above factors have contributed to poor economic performance, low industrial investment, inadequate andmediocre social services. They have led to a wastage of national resources, competitive disadvantages for producersof quality goods and services, a crisis in financial institutions, an inability to control crime or lawlessness, an inabilityto protect the weak against the strong, an erosion of credibility and legitimacy of the government, social frustration,and have provided an inducement for dysfunctional social behaviour."

2.05 The current situation presents an opportunity for public expenditure reform that should notbe missed. Pakistan's fiscal problems and the need for sustained macroeconomic stabilizationmean that change is inevitable, but it would be far better for the country's development if changesare guided by reforms based on a clear vision of the role of government, rather than occurringthrough collapse of many public sector institutions and service delivery due to lack of funds.

Recent Developments

2.06 Recognizing the gravity of the fiscal crisis, the present government, which came into officein February 1997, initiated a major economic reform program. An important aspect of reform hasbeen the efforts of the Pakistan 2010 Initiative and other bodies to develop a longer-term visionincluding changes in the role of the state. Specific reforms include an effort to accelerate andbroaden the privatization program (discussed separately), a major exercise to downsizegovernment departments and public sector corporations, a voluntary "golden handshake" schemeto encourage early retirement and thereby reduce the size of the civil service, and measures toprevent political intervention in micro-level public sector decisionmaking.

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2.07 Block allocations in the federal and provincial budgets for development projects sponsoredby members of the National and Provincial Assemblies have been discontinued. Politicians'quotas for residential plots, government employment, and places in educational institutions havebeen abolished. Discretionary allocations of Pakistan Steel Mills products and petroleum productshave been stopped and an auction system introduced for export quotas. An Accountability Act andprocess have been put in place to investigate cases of corruption. These measures are welcome,but they need to be fully and effectively implemented in a sustained and evenhanded manner.

2.08 A Committee on Downsizing of the Federal Government was established to criticallyexamine all federal ministries and divisions, attached departments, and most public sectorcorporations, with a view to ascertaining whether their continued existence is justified, and if so inwhat form and at what scale of employment and activity. Criteria used by the Committee to guideits work are listed in Box 2.2. The Committee recommended a net reduction in the number offederal ministries from 26 to 18 and in the number of divisions from 31 to 24. While changeswere proposed for only about 31 % of the 422 attached departments, these would have resulted in areduction of 57,000 staff. Sixty of the corporations and autonomous bodies were proposed to beabolished or privatized, more than 100 to be merged or downsized, and others to be transferred tolower levels of government. Although some of the largest public sector corporations were notreviewed because they were being separately assessed, the corporations and autonomous bodiesrecommended to be abolished have a total employment of nearly 22,000, and corporationsproposed to be privatized have a total of 67,000 employees. After completion of the technicalwork of the Committee and preparation of a report, implementation of the downsizing exercisewas deferred due to political concerns about the large numbers of public sector employees thatwould be rendered surplus.

2.09 Subsequently, a voluntary "Golden Handshake Scheme" (GHS) was announced in August1997, under which civil servants could apply for early retirement (see Box 2.3). The main benefitoffered was to allow departing staff with more than 10 years of service to draw a pension, whichnormally would have required at least 25 years of service. This included the right to convert halfof the monthly pension into an up-front lumpsum payment, based on life expectancy at time ofretirement with no discounting of future pension payments brought forward. As noted in Box 2.3,the GHS was introduced hurriedly and suffered from several design problems, including lack oftargeting, distorted incentives, and large up-front fiscal costs. In view of these problems as well asparliamentary and labor opposition, the GHS has been put on hold.

2.10 The government formed a Commission on Administrative Restructuring (CAR) in August1997, initially to review the work of the Committee on Downsizing and develop a broad-basedapproach to federal government restructuring. Subsequently the CAR was also asked to review theGHS and play a more general role in conceptualizing public sector reforms. The CAR hassubmitted an interim report, which suggests a comprehensive review of the roles of government,broader civil service reforms, and consensus-building. The CAR has also conducted detailedreviews of more than a dozen federal government divisions and has made specificrecommendations for organizational restructuring and staffing changes, which have beensubmitted to the Cabinet for approval. Reviews of all the remaining divisions are planned. Othergroups have been set up to coordinate work on civil service reform, revise the rules of business,etc.

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Box 2.2: Criteria for Downsizing/RestructuringThe following criteria were used by the Committee on Downsizing of the Federal Government in its review of

federal ministries and divisions, attached departments. and autonomous bodies and public sector corporations:* Is the public entity producing a public good or a purely private good? (Govemment printing and stationery

departments appear to be good examples of non-commercial public production of purely private goods.)* Is the public entity facing competition from the private sector? (Possible examples include the Utility Stores

Corporation, publicly-owned sugar mills in Sindh, and bus transport and surface mining activities in Punjab.)* Is the entity surviving only because of some special protection or preferential treatment? (Pakistan Steel Mills is a

good example.)* Is the entity so overextended that all it can do is to cover the cost of its own establishment? (The agricultural

research/extension system in Sindh is dominated by its own establishment costs and therefore is doing littlemeaningful operational work.)

* Has the mission of the entity disappeared? (Provincial Directorates of Industry, whose main activity was licensingof industrial firms before deregulation but which now appear to be mainly involved in boiler inspections, seem tofit this criterion.)

* Is there duplication of activities among agencies? (The institutions involved in running labor training institutions,including small industries development corporations and labor departments, among others, are a good example.)

* Does the institution represent encroachment upon functions of a lower level of govemment?* If it is a commercial venture, is the public entity making losses?

Approach to Reform

2.1 1 Public expenditure reform must start from a vision of the appropriate roles of the state andits various instruments post-reform. There is already a widespread consensus on much of the newvision in Pakistan. The government's Pakistan 2010 Vision Statement speaks of "a newgovernment, small but effective, decentralized, responsible, customer-oriented, and managedprofessionally," and of a partnership between the government, the private sector, and the citizen.The Committee on Downsizing of the Federal Government advocated "changes in the character ofthe government from that of a provider to that of a regulator and enabler."

2.12 While the changing roles of the state would imply downsizing of the public sector in manyrespects, a core set of functions should remain its responsibility; indeed, the public sector roleshould expand in some areas (not necessarily in financial terms). Intervention should be based onwell-known criteria related to market failure (public goods, so-called "merit goods," externalitiesof various kinds), but only provided that the expected benefits of intervention clearly exceed thecosts by a substantial margin. Another consideration is whether and on what time horizon theprivate sector could be expected to handle the activities concerned. The objective of povertyreduction also can justify government intervention, provided it is cost-effective and well-targeted.Finally, even if there is a clear justification for public sector involvement, this need not take theform of direct public sector provision of goods or services; alternatives include subsidization ofprivate or NGO provision, regulation, information provision, etc.

2.13 In line with these principles, some of the most important changes required in the role of thegovernment include the following:

2.14 Effective, transparent, evenhanded regulation. Whole swathes of the economy need acertain minimum, yet effective, degree of government regulation. In the past the government'sregulatory role has been entirely missing in many areas and, where present, was used in a

13

counterproductive manner as a micro-level control mechanism (e.g. past licensing of privateindustrial investment). The control-oriented civil service is not accustomed to transparent, arms-length regulation of the private sector, autonomous from government line agencies. Effectiveregulation is essential in key infrastructure sectors where existing public sector monopolies arebeing restructured for privatization and new private investment is being encouraged. Recognizingthis need, the government has set up and is operationalizing regulatory institutions in energy andtelecommunications, but their capacity and autonomy and the rules of the game are not yet clearlyestablished. Many unregulated activities urgently need effective regulation for health, safety,quality control, or other reasons (e.g. certification of private education and the qualifications ofhealth care providers, prevention of adulteration of pesticides, and environmental regulation). Ofcourse, regulation cannot be allowed to degenerate into opportunities for officials to collect bribesfrom regulated private sector entities or individuals.

2.15 Exit from direct public sector involvement in commercially-oriented activities best leftto the private sector. The process of privatization is already well underway, but the government'sambitious program needs to be effectively implemented in a phased manner. The governmentshould also exit from departmental and other non-commercial activities that are no longernecessary or can be effectively handled by the private sector.

2.16 Shedding the role of directly providing employment for the society. Maintainingpublic sector employment no longer can be treated as a prior claim on resources over the mediumterm, not to speak of new employment generation. Instead, levels of employment in public sectoractivities should become closely related to the objectives and staffing needs of those activities.

2.17 Provision of public information. This is a relatively neglected area where the publicsector has a clear-cut role. In addition to provision of timely and accurate data and analysis of apublic good nature on relevant economic and social topics, availability of information on theactivities of the public sector, their costs, and their outputs/outcomes is essential for greateraccountability and openness.

2.18 Effective provision of basic social services. This is the main area where the public sectorwill continue to play a direct role in production of goods/services, but with primary focus ongreater effectiveness to achieve much better outcomes in terms of Pakistan's social indicators.This will require a genuine service orientation among both service providers and managers, alongwith adequate technical and management capacity and appropriate incentives.

2.19 The delineation of the appropriate roles of government also has a strong sectoraldimension. Hence it is essential to critically assess public expenditures in each sector and majorsubsector in the light of sectoral objectives and the desired role of the government. If this is donesystematically, disconnects between sectoral expenditure patterns and institutional structures onthe one hand and sectoral development objectives and appropriate government roles on the otherwill become apparent. On this basis, adjustments can be programmed.

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Box 2.3: The Golden Handshake Scheme for Federal EmployeesIn August 1997 the government offered a "Golden Handshake Scheme" (GHS) to encourage voluntary

retirement by employees of the federal govemment (including Pakistan Railways). For employees with less than 1 0years of service, three months' base pay for each completed year was offered. Staff with 10-20 years of service wereoffered a pension (based on years of service) on a par with the terms applicable for the minimum length of servicefor normal retirement (25 years). Those with 20-25 years of service were offered pension terms comparable withnormal service of 30 years, and those with more than 25 years service the terms normally applicable for persons with35 years of service. Additional benefits included the right to stay in existing govemment housing for a year afterretirement and the right to purchase an official car at depreciated value for retiring officials entitled to a car.Departing staff would be banned from taking public sector employment for two years.

While the benefits offered superficially appear to be relatively modest, the eligibility of staff with more than10 years of service for a pension means that they would benefit in a major way from the uniquely generouscommutation provision for Pakistani civil servants - half of the monthly pension can be converted into anundiscounted lumpsum payment based on life expectancy at time of retirement. With a longer life expectancy,relatively young staff with at least 10 years of service would benefit from a much higher commutation paymentwhich would at least to a large extent offset the effect of having fewer years of service. Older staff close to thenormal minimum length of service for retirement would benefit less. Thus the GHS probably generated the strongestincentives for retirement in the case of mid-career staff with 10-15 years of service, which may not be optimal. Theincentive effects generated by the interaction of accelerated retirement, age, and pension commutation do not appearto have been taken into account in designing the scheme

Up to the end of September 1997, 72,088 federal employees, comprising about 10% of the existing pool,had formally indicated their intention to opt for voluntary retirement, and as of February 1998 more than 80,000persons had taken up the GHS. Among the 72,088 initial applicants, for whom detailed data are available, 97.5%were in the relatively lower grades (BPS 1-16) and 40,500 (56% of the total number) were in Pakistan Railwaysalone. The government's estimate of the total up-front cost of the GHS for the initial applicants was Rs 17.6 billion.Although data on resulting savings in establishment costs are not available, very crude estimates based on asimulation with a grade mix of retiring employees about the same as that of the existing pool indicates that annualsavings would be about 11.5% of the upfront cost. These calculations do not, however, take into account othersavings related to reduced use of office space, utilities, vehicles, supplies, etc.

The GHS had several problematic aspects, including the following:* There was complete lack of targeting by organizations or categories of employees, although the high

share of lower-grade staff opting for the scheme and the fact that the majority were from the Railways suggest thatthe composition of retirees may not have been inappropriate. According to anecdotal evidence, some of the moretechnically-oriented entities (e.g. research institutes) would have suffered a significant loss of needed skills.

* The interaction between benefits, age, and pension commutation appears to have had counterproductiveincentive effects which most likely were unintended.

* The GHS was not part of a longer-term program to ensure that problems of overstaffing in thegovernment would not recur, possibly through widespread re-hiring of retirees as occurred in Sri Lanka.

* Based on the benefits formula and the revealed preference of most senior-level civil servants not to takeup the GHS, the scheme evidently did not adequately take into account the explicit and implicit perquisitesassociated with higher-level civil service jobs.

Lack of funding (only Rs 2 billion was provided for golden handshakes in the 1997/98 budget),Parliamentary and some labor opposition, and perhaps some of the flaws noted above led the government to hold upimplementation of the GHS until completion of a broader review by the Commission on AdministrativeRestructuring. Nevertheless, the rushed initiation of the GHS and subsequent reversal may make it difficult toinstitute better-designed and better-targeted departure programs for civil servants in the future, since targetedprograms could now face legal challenges on the grounds that the GHS had been offered to everybody.

2.20 The federal-provincial-local dimension needs to be addressed in rethinking the role of thestate. Since different levels of government have different comparative advantages with respect tovarious functions, it is important to specify the appropriate level of government to carry out each corepublic sector activity, with division of labor and avoidance of excessive duplication and overlap.Pakistan's Constitution, which clearly delineates the broad functions of the federal and provincial

15

governments, provides a good foundation for such an effort. The disconnect between very limitedrevenue mobilization and major expenditure responsibilities at lower levels of government also needsto be addressed.

2.21 More specifically, the progressive centralization of control over public expenditures thatoccurred during the past several decades needs to be reversed in line with the broad assignment ofresponsibilities in Pakistan's Constitution. The existing highly centralized government structuresat federal and provincial levels are not conducive to effective public sector functioning and servicedelivery. Moreover, management of public sector activities needs to be brought down to levelswhich are much closer to the beneficiaries so as to be responsive to needs, and this will also beconducive to meaningful accountability for results. Locally-oriented public sector activitiesgenerally should be handled by local governments. This will require not only restoration ofelected local governments as envisaged but also their reorganization along rational managementlines (in particular consolidation of numerous fragmented urban agencies), building up theirtechnical and management capacity, and putting them on a sound financial footing. Similarly, thefederal government has encroached on many provincial areas of responsibility, and the institutionsand activities concerned need to be returned to provincial control.

2.22 Finally, governance reforms lie at the core of the changing role of the state. Respondingto the problems mentioned in Box 2.1, the government's Pakistan 2010 Vision Statement sees theneed for reforms in five key areas: (1) civil service reform; (2) legal and judicial reform; (3)legislative reform; (4) decentralization; (5) eradication of corruption, and (6) citizens' charter (i.e.citizens' involvement in oversight and accountability).

Public Enterprises and Privatization

2.23 Public enterprises. In line with the interventionist role of the state pursued in earlierdecades, numerous public enterprises (PEs) were established in various sectors. Some sectors(banking, airlines, power, etc.) were nationalized in their entirety. PEs also play a dominant role inkey infrastructure and service activities such as oil and gas, railways, telecommunications, andagricultural commerce. In these sectors PEs tend to be large, monopolistic or oligopolistic entitiesfacing little effective competition. There are also large PEs in basic industries like steel, cement,fertilizers, heavy engineering goods, etc.

2.24 PEs suffer from operational inefficiencies, overstaffing, inappropriate incentives,misdirected investments, inadequate O&M, political intervention in their decisionmaking, andother problems which adversely affect their performance. Intended to build up the nationalinfrastructure and production base, PEs have become a vehicle for employment creation, politicalpatronage, and corruption. Appointment of generalist civil servants as PE managers and frequenttransfers of managers have contributed to PEs' problems. Their inefficiency has resulted in highcosts to the private sector as a result of high prices of utilities and other basic inputs. High costs,in many cases poor quality of supply, and tariff and/or other forms of protection for PEs havehindered large parts of Pakistan's manufacturing sector from becoming internationally competitive(for example the engineering goods industry). As a result of underinvestment and worseningunderfunding of O&M, much of Pakistan's public infrastructure has been deteriorating, with largeeconomic costs - both for private sector users and in terms of the mounting cost of rehabilitationor new investments needed to reverse the deterioration. High intermediation costs in public sector

16

financial institutions (due to overstaffing and inefficiency) and their poorly performing loanportfolios have contributed to high interest costs for the private sector.

2.25 The direct contribution of PEs to Pakistan's chronic fiscal problems is significant andgrowing. The overall deficit (borrowing requirement) of seven major PEs reached about 2% ofGDP in 1996/97, not including several large loss-making PEs like PIA and Pakistan Steel Mills.The huge build-up of non-performing loans of public sector banks and financial institutionsconstitutes a threat to macroeconomic stability. PEs' financial problems also have balance ofpayments implications.

2.26 Problems are most acute in the power sector. The deteriorating financial condition ofPakistan's electric power utilities (WAPDA and KESC) has resulted from operationalinefficiencies, large line losses/thefts, related widespread corruption, increasing use of high-costprivate power, and failure to increase electricity tariffs from mid-1996 until early 1998. Thesefinancial problems have spread to other public sector energy firms as a result of non-payment ofbills, leading to large cross-arrears among PEs and vis-a-vis the government. The governmentimposed a 21% increase in electricity tariffs in early 1998 as part of a major reform program forthe power sector to bring it back to financial solvency, but organizational restructuring also needsto move forward in a timely manner.

2.27 Since the privatization process inevitably will take a considerable period of time, it is veryimportant during the interim that PEs remaining in the public sector be restructured and theirefficiency improved to better prepare them for privatization. Key recommendations of committeesformed last year to review the performance of seven major PEs include appointment ofprofessional management, restructuring to improve operational efficiency, expenditure controls,stepped-up efforts to collect overdue receivables and settle arrears, and rationalization of staffing.In addition, governance improvements and prevention of political interference in routinemanagement will be critical, as well as phasing out artificial protection and other crutches for PEs.Restructuring programs have been started in a number of PEs, but strong implementation andfollow-through will be essential. Transitional options like management contracts (consistent withthe privatization strategy) may be appropriate in some cases and should be explored.

2.28 Privatization. After rapid growth of the PE sector in the 1970s and 1980s, a privatizationprogram was initiated at the beginning of the 1990s and has achieved considerable success. Todate, out of a total of about 150 PEs offered for privatization, 97 have been privatized. Notableachievements include sale of 12% of the equity of Pakistan Telecommunications Company Ltd.(PTCL) to domestic and foreign investors and sale of the Kot Addu thermal power plant. The bulk(84) of the successfully privatized units are in manufacturing, while four commercial banks and adevelopment finance institution also have been privatized. Privatization has not yet made muchprogress in the case of utilities, infrastructure, and to a lesser extent energy.

2.29 As shown in Figure 2.1, the pace of privatization has been uneven and has slowed downsharply in the past two years. This partly reflects the greater difficulties of privatizing large PEs insectors characterized by highly imperfect competition, as well as political uncertainties and changes.Even in the case of small and medium-sized manufacturing units, the progress of privatization hasslowed down due to a variety of reasons. Successful bidders sometimes failed to respond andpreferred to forfeit their bond rather than acquiring a unit, which then had to be offered again. Thebid/transfer process was sometimes blocked by court orders as unsuccessful bidders, employees, or

17

previous owners brought cases against privatization. Finally, as the more attractive concerns weresold, the remaining, less attractive PEs were left on the roster for privatization.

2.30 More generally, privatization has been constrained by a number of factors, including weaktechnical capacity in the Privatization Commission (PC); opposition by some line ministriessupervising public enterprises; labor problems and up-front fiscal costs of dealing with surplusstaff in larger PEs; the unattractiveness of many PEs on account of their poor financialperformance and overstaffing; reluctance of potential foreign buyers to come forward, reflectingweak confidence and limitations imposed by country risk/exposure considerations in a weakinternational environment; lack of transparency of some past privatization transactions; difficultiesin assessing qualifications of prospective bidders; lengthy procedures and delays; and lack ofeffective regulatory institutions in natural monopoly sectors. Although regulatory agencies havebeen established for telecommunications and power, their capacity needs to be built up and theiroperations put on a fully autonomous basis.

Figure 2.1: Privatization Transactions and Sales Proceeds

40 F0Number -

35 5 Value (Rs Bilion)

30

25

20

15

I o

10

Source: Privatization Commission

2.31 Responding to these problems, the government in 1997 announced an acceleratedprivatization program with broader scope and ambitious targets. The medium-term objective is toprivatize all remaining public sector banks and non-bank financial institutions, major publicutilities, power generating facilities and area electricity boards, and industrial units. Thegovernment has already approved the sequence of privatization in the power sector, and externalfinancial advisors for privatization of two area electricity boards and KESC have been selected.The privatization process for PTCL has been. re-started. Two national shipping companies areslated for privatization, and PIA plans to transfer its non-core activities to the private sector. Saleof the non-core assets of Pakistan Railways is planned. The technical capacity of the PC has beenenhanced and its powers have been substantially increased, giving it full authority overmanagement of enterprises to be privatized and implementation of any regulatory arrangementsnecessary for privatization. The Cabinet Committee on Privatization, which had to refer decisions

18

to the full Cabinet, has been replaced by a high-powered Privatization Board headed by the PrimeMinister.

2.32 Although the desire to jump-start privatization is understandable, the obstacles andconstraints mentioned above will need to be addressed effectively in order to permit privatizationto proceed at a faster pace. It is roughly estimated that the privatization program could yield saleproceeds totaling over $20 billion in the coming 4-5 years, if fully implemented. The governmentis conmmitted to using such proceeds for debt reduction rather than to fund public expenditures.Since this is the only approach which will result in a permanent reduction in the debt and interestburden of the government, it should be strictly adhered to. In order to move ahead with theprivatization process, the following measures need to be implemented:

* Strengthening the regulatory framework. The government must ensure that the coreinfrastructure regulatory authorities are credible, effective, and autonomous. This will greatlyimprove the marketability of public sector utilities.

* Removal of labor-related impediments to privatization. The problem of surplus labor, amajor hurdle to privatization of large public enterprises, should be tackled through attractivevoluntary separation schemes within overall budgetary constraints. Labor unions should bebrought on board in the process of privatization through consultations.

* Further strengthening of the Privatization Commission. The capacity of the PC needs to befurther strengthened, it needs to be provided with adequate financial resources, and allowedgreater flexibility to engage professionally competent staff.

* Credibility of the privatization process should be ensured by maximizing transparency andavoiding the governance problems that sometimes detracted from earlier privatization efforts.Judicial procedures need to be streamlined to settle legal issues in a timely manner.

Provincial Finances

2.33 Pakistan's four provinces account for 28.5% of total national budgetary expenditure and amuch higher (54%) share of non-defense, non-interest spending. The bulk of public expenditureson education, health, agriculture, and rural water supply occur at the provincial level, while theprovinces also account for a large share of total spending on roads, irrigation, urban services, andthe wheat subsidy. Most of the government administrative apparatus is concentrated at theprovincial level as well. Key structural features of provincial finances (some of which areillustrated in Figure 2.2) include:

* Heavy reliance on federal transfers (shared taxes, grants, loans, transfers of hydel profits,natural gas surcharges/royalties), which comprise around 80% of total provincial receipts.

* Narrow, weak, and inelastic revenue bases (mainly relying on motor vehicle tax, stamp duties,etc.), which have not been fully exploited - notable examples include urban property tax, salestax on services, and agricultural income tax.

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* Expenditures dominated by establishment costs (civil servants' pay, benefits, and pensions),debt servicing, and subsidies (primarily on wheat) - these comprised nearly 80% of totalbudgeted provincial current expenditure in 1997/98.

* Weak expenditure management, reflecting inadequate planning, implementation, andmonitoring capacity, political involvement in decisionmaking, governance problems, etc.

* Substantial provincial indebtedness (mainly to the federal government) and, for threeprovinces, persistent large overdrafts with the central bank and resulting cash flow problems.

2.34 These structural rigidities have complicated the provinces' task of fiscal adjustment.Historically, they have found it difficult to mobilize adequate revenues, and some higher-yieldingtax bases have been eroded or abolished as a result of government policy (e.g. excise duties onliquor and land revenue). At present, given the small share of their own revenues in totalprovincial resources, greater efforts by the provinces to mobilize additional revenues from theirexisting tax bases would result in only a limited improvement in their overall fiscal picture in theshort run. By the same token, fluctuations in federal tax receipts (and in corresponding transfers tothe provinces) can force major cutbacks in provincial expenditures. Since establishment costs aredifficult to reduce quickly, the pressure has fallen on development spending and non-wage O&M.

Figure 2.2: Composition of Provincial Revenue and Current Expenditure

Revenue, 1997/98 Current Expenditure, 1997/98

ProvincialRevenues Others Interest

21% 21% g __ 19%

Federal Subsidies

Grants 4%4%

DirectTransfers

8%

Divisible WagesPool 56%

Transfers67%

Source: Provincial budget documents.

2.35 Revenue sharing between the federal and provincial governments occurs in accordancewith the National Finance Commission Awards, issued every five years by a National FinanceCommission (NFC) established by order of the President. The 1991 NFC Award, the first sincethe 1970s, restored a direct linkage between the level of federal transfers to the provinces andfederal tax receipts. It was intended to give the provinces incentives to economize on expendituresand mobilize additional revenues. However, the provinces shared in 80% of net federal receiptsfrom sales and income taxes, while the federal government retained receipts from customs dutiesin their entirety. Subsequent tax reforms shifted the structure of taxation in favor of direct taxes

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and VAT and away from import tariffs, which resulted in rapid revenue growth for the provincesand a tighter budgetary squeeze on the federal government. As a result, the provinces couldsharply increase their spending on basic social services (under the SAP), with less painfuladjustments in other areas than otherwise would have been necessary. Nevertheless, non-wageO&M in other sectors has suffered and development spending has been subject to widefluctuations, while provincial establishment costs grew rapidly.

2.36 The 1997 NFC Award introduced sharing of all major taxes at a uniform rate of 37.5% (seeBox 2.4), which removed the previous distortions resulting from differential sharing rates. Toencourage the provinces to mobilize more revenues from their own sources, the targeted growthrate of the provinces' own revenues has been raised (from 8% per year under the previous Awardto 14.2%), with an additional federal matching grant for provinces that exceed this target. A smallfiscal gap also was incorporated into the revenue sharing formula as a further inducement for theprovinces to raise more revenue and economize on their expenditures. This gap became greatlyenlarged, however, as a result of several developments after the NFC Award was promulgated.First, the 1996/97 outcome in terms of federal revenue collection turned out to be considerablyworse than the estimate used in the NFC Award (the 1996/97 Budget target), lowering the base forfederal transfers to the provinces in relation to the expenditure projections of the Award. Second,major tax reductions in March 1997 significantly lowered federal tax revenues and correspondingtransfers to the provinces. Third, federal tax revenues in 1997/98 have fallen somewhat short ofthe 1997/98 budget estimates.1 Finally, two procedural changes in 1997/98 further complicatedthe provinces' short-run cash management. The federal government provided special low-interestdevelopment loans totaling Rs 12 billion to the provinces in 1997/98, which covered part but notall of the revenue shortfall due to all of these factors.

2.37 These recent developments, coming on top of the adverse trends and structural problemsdescribed earlier, have put an unprecedented fiscal squeeze on the provinces, which has reachedcalamitous proportions for many public sector activities. Although Punjab has a stronger revenuebase and has managed to avoid liquidity problems, this could change when the province's positivecash balance with the central bank is exhausted. In other provinces, overdrafts with the centralbank have increased; development programs have been severely affected; non-wage O&M hasvirtually dried up; bills are not being paid (WAPDA electricity bills in particular); and civilservants' salary payments have been delayed for brief periods of time in the case of Sindh. In theabsence of fundamental changes, the situation will further deteriorate.

2.38 The provinces thus face a formidable agenda of fiscal adjustment and reform. Theirdependence on federal tax transfers and (in the case of NWFP and Balochistan) financial flowsfrom public sector energy corporations leaves them highly vulnerable to poor financialperformance by the federal government. The rigid structure of provincial expenditures, and the

1 Although part of this shortfall is being made up by higher than budgeted revenues from the oil surcharge, these arenot shared with the provinces.

2 Instead of transferring to each province one-twelfth of total budgeted transfers (not including additional receiptsexpected to accrue due to new revenue mobilization measures) in the first half of each month, the federal governmentis now transferring to the provinces the stipulated share of actual receipts in each month. Moreover, transfers are nowmade early in the following month, when federal tax revenues of the previous month are known.

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urgent need to restore spending on non-wage O&M in key sectors as well as to increase SAPspending, make it difficult for the provinces to adjust their expenditures in a manner that improvestheir structure. Nevertheless, without meaningful fiscal adjustment by the provinces, Pakistan willbe unable to achieve macroeconomic stabilization on a sustainable basis. On the expenditure side,key elements of the reform agenda for the provinces include the following:

2.39 Rationalize the provincial administrative structure and staffing. The provinces have toomany organizations and are heavily overstaffed in many areas. Since establishment costs are byfar the largest expenditure category at the provincial level, reducing their share in total spending isessential. While a "downsizing exercise" like that initiated by the federal government may behelpful in weeding out the most obvious anomalies, there is no substitute for a systematicrethinking of the appropriate, affordable roles of government at the provincial level andrestructuring expenditures and administrative structure accordingly.

Box 2.4: The 1997 NFC AwardThe new NFC Award, announced in February 1997 and implemented starting with the 1997/98 budget,

brought some major structural changes in the formula and modalities for revenue sharing between the federal andprovincial governments. Under the new revenue sharing arrangement, the divisible pool of tax revenues has beenexpanded to incorporate all federally collected taxes, including customs duties which had previously been retained bythe federal government in their entirety. As against the previous Award, which allocated 80% of net receipts of taxesin the divisible pool to the four provinces, the new formula allocates 37.5% of the enlarged divisible pool to theprovinces. The inclusion of customs duties in the divisible pool in the new NFC Award has removed the bias againsttrade liberalization and broadening of the base of domestic indirect taxes.

The new shares of the federal and provincial governments in the divisible pool were derived by defining: (i)the "National Resource Picture" for the period of the Award (1997/98-2002/03), which includes projections for allfederal and provincial government revenues and resources likely to become available to the federal government inforn of loans (and grants) mobilized internally and from foreign donors; and (ii) "priority expenditures" (defined toinclude defense, interest payments, Core Development Program, Social Action Program. and non-SAP developmentexpenditures of the provincial governments), which need to be protected by the new revenue sharing formula. As inthe past, the revenue assigned to the provinces is distributed among them on the basis of their respective populationsaccording to the 1981 Census. The smaller provinces of NWFP and Balochistan also receive NFC-mandated revenuedeficit grants amounting to Rs 3.3 billion and Rs 4.1 billion, respectively, from the federal government in 1997/98 (tobe increased annually by 11 % in nominal terms, subject to subsequent adjustment for inflation in each of the followingfour years).

The provinces will continue to receive "straight transfers" from the federal government on account of royalty,excise duty, and surcharge on natural gas and royalty on crude oil, based on each province's share in total production.Similarly, profits of hydel generation will continue to be transferred to the provinces by WAPDA.

Under the new Award, greater emphasis is placed on resource mobilization by the provinces, as provincialrevenues are projected to increase by at least 14.2% per year, compared with 8% per year under the 1991 NFC Award.Moreover, as an incentive, the federal government will provide the provinces with matching grants whenever thegrowth in their revenues exceeds the minimum stipulated growth target. The provinces are also expected to financethe rupee components of their development programs from their own revenue surpluses, and no Cash DevelopmentLoan (CDL) would normally be provided by the federal government for this purpose.

2.40 Strengthen tax administration and fully exploit existing tax bases. Some existingprovincial tax bases are grossly underutilized, urban property tax being an example - it isestimated that receipts from this tax could be doubled within five years with improvements inassessments, record-keeping, and collections. The provinces also need to effectively implementthe agricultural income tax and improve it so that it can become a significant source of revenue. Athorough restructuring and strengthening of provincial tax administration is needed to increaseresource mobilization and reduce leakages. The long-term goal should be tax authorities that are

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strong enough to engage in sharing of tax bases with the federal government (through directcollection, piggy-backing, etc.), rather than relying on federal collection and transfers.

2.41 Privatize activities where the rationale for public sector involvement is weak.Commercially-oriented activities currently operated by provincial governments at very iow levelsof efficiency should be shifted to the private sector. Many of these activities are organizeddepartmentally rather than in public enterprises. Examples include the road maintenance andconstruction operations of the Construction and Works Departments, similar activities in thePublic Health Engineering Departments, many agricultural extension services, etc.

2.42 Increase cost recovery for provincial public services with mainly private benefits.Examples include urban water supply and sanitation, irrigation, agricultural extension services,and some education and health services with primarily private benefits.

2.43 Decentralize service delivery and management for locally-oriented public sector activities,with beneficiary participation, in the context of strengthening local governments' capacity andaccountability. Examples include primary education and basic public health services, O&M ofrural water supply schemes, rural roads, many urban services, etc.

2.44 Strengthen accountability and address problems of corruption and wasteful expenditures.Strong efforts are needed to counteract widespread corruption in public expendituredecisionmaking and in tax administration at the provincial level.

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3. IMPROVING PUBLIC EXPENDITURE MANAGEMENT

3.01 Improvements in the management of public expenditure lie at the heart of publicexpenditure reform. In this chapter the serious weaknesses of Pakistan's public expendituremanagement system (PEMS) are first identified. Then an approach to reform based on a medium-term expenditure framework (MTEF) is outlined. Building on the significant actions alreadyinitiated by the government and consistent with the overall reform strategy, the chapter also putsforward a number of near-term measures to improve public expenditure management.

Systemic Weaknesses

3.02 Problems are evident both in the basic structure of Pakistan's PEMS and in the way thesystem is implemented in practice. At their root is continuous overcommitment of publicresources. Any resource allocation system faces constant demands, but in Pakistan (as in manycomparable countries) the PEMS exacerbates the undesirable effects. Pressure to increasespending is built into the way budgets are formulated. Departments bid against each other forfunds, with the core agencies trimming the budget (ex ante or during implementation) to fitavailable resources. It is therefore a rational strategy for each department to bid well above thelevel of resources it is likely to get and to minimize its estimates of the costs of the activities forwhich it seeks funding. Similar competition for development funds takes place, with a strongincentive to get projects included in the Public Sector Development Program (PSDP), even if notadequately funded. Politically-driven demands for expenditure focus on public sector employmentand initiation of favored projects. These pressures bias resource allocation toward fragmentationof development expenditures and in favor of establishment costs at the expense of other recurrentspending. Finally, federal-provincial fiscal arrangements also have tended to increase the gapbetween expenditure demands and sustainable levels of funding by distancing expenditure fromrevenue decisions and through overlapping federal and provincial service provision.

3.03 Budget preparation. The predominantly incremental approach to budgeting currentlypractised is reinforced by line-item, control-oriented budget documents unsuited for strategic orprogrammatic analysis. Budget preparation begins without explicit guidelines on funds availablefor each department or activity, leaving departments to take the previous year's budget as a naturalstarting point. The budget process itself focuses most attention on so-called "continuing" and"new" expenditures which together account for less than 10% of the total, leaving the bulk ofspending to be carried forward by inertia (see Box 3.1). Although the preparation of estimatesbegins by asking departments for bids, final decisions are made centrally and often in a fairlyarbitrary manner. As a result, those who initially prepare budget estimates cannot, in practice, beheld responsible for the quality of the departmental budgets that emerge.

3.04 Budget implementation. The implementation stage is critical because it may result inchanges in budget allocations ex post and also strongly influences the effectiveness of publicexpenditures. At both federal and provincial levels there are difficulties in implementing approvedbudgets. Budgeted funds sometimes are released late or not at all in the face of fiscal constraints.The PSDP bears the brunt of cuts, but recurrent budget funds also may be delayed or withheld.The resulting uncertainty reduces the effectiveness of expenditures. There is logic in measures toprotect key programs (such as the SAP) from general stringency, but this only addresses a

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symptom, not the fundamental problem which is the persistent tendency to forrnulate and adoptbudgets that are beyond the government's financial capacity to implement. Although the system ofFinancial Advisors (see Box 3.2) is intended to expedite decisionmaking between the FinanceDivision and line departments, especially in the implementation phase, there appears to be roomfor improvement in this area and in budget implementation processes more generally.

Box 3.1: Permanent, Continuing, and New ExpendituresIn Pakistan's budgetary process, initial estimates of current expenditure are prepared separately for (1)

"permanent" expenditures and (2) "temporary" (also called "continuing") and new expenditures.These distinctions are maintained only during preparation and scrutiny of estimates; they are not shown in the

budget submitted to the legislature. New expenditures admitted to the budget become continuing expenditures in thenext year's budget review and are shifted to the permanent category after continuing for five years.

Estimates of temporary and new expenditures are subjected to more vigorous and detailed scrutiny thanpermanent expenditures. Temporary and new expenditure proposals are supposed to be submitted earlier, and thosecleared are included in a Schedule of New Expenditures (SNE) for incorporation in the budget. Among these are therecurrent costs of completed projects. However, the SNE is draw-n up before available resources are known, so it isnot conclusive. Expenditures included in the initial SNE may subsequently be cut, and it may also be necessary to cutpermanent expenditures in order to accommodate new ones.

For the 90% or so of recurrent expenditures which are "permanent", the budget process is quite mechanical,with standard percentage increases being applied to different components, such as salaries and maintenance and repairs(M&R). Although there are numerous standard ratios or norms which are supposed to be used to draw up recurrentbudgets for ongoing activities, these are not updated regularly, and overall excess demands on the budget mean thateven the outdated norms are not observed in practice.

3.05 Accounting, reporting, and audit. Pakistan's fiscal accounting system dates back to the1930s. Corruption and abuses have become entrenched. Thorough modernization is required todevelop the management functions of the system and strengthen expenditure control. Technicalimprovements, including computerization, need to be accompanied by training and upgrading ofstaff. Fiduciary controls need to be enforced, ambiguities in the assignment of responsibilitiesneed to be resolved, and better financial management information systems developed.

3.06 The audit role of the Pakistan Audit Department (PAD) is compromised by itssimultaneous responsibility for both auditing and accounting functions of government, and also byits financial and administrative dependence on the executive branch. The separation of accountsand audit functions has been completed in other developing countries like Thailand, Korea,Bolivia, El Salvador, and Argentina, as part of their progress toward democratization andimproved public accountability. The government recognizes the need to follow the same path inPakistan and has developed a phased program for separation of the Auditor General's accountingand audit functions by July 1, 2000. This schedule needs to be adhered to.

3.07 The fiscal reporting system does not adequately serve the macro, allocational, or efficiencyobjectives of expenditure management, i.e. (i) monitoring the fiscal deficit and its financing; (ii)managing the government's cash and debt position; (iii) monitoring expenditures in relation toappropriations; and (iv) providing analysis to assist with policy formulation and performancemeasurement. As a result, initial budget allocation decisions are less well-informed than theyshould be, and within-year control measures are cruder and more abrupt (and therefore more costlyin terms of operational efficiency). Concrete problems with Pakistan's fiscal accounts arediscussed in Box 3.3.

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Box 3.2: Role of Financial AdvisersThe system of Financial Advisers (FAs) was first introduced in 1960 to complement the role of Finance and

Accounts Officers (FAOs). The Revised System of Financial Control and Budgeting provides that "in eachministry/division there shall at least be a well-trained and experienced Finance and Accounts Officer, who shall be aDeputy Secretary or a Section Officer, as may be appropriate, for advising the Principal Accounting Officer on allfinancial, budgetary and accounting matters." The FAO is under the administrative control of the division to which heis attached and is paid from its budget. The FAO is required to coordinate and supervise the preparation of recurrentbudget estimates and the Annual Development Program, ensure proper maintenance of accounts, maintain internalchecks on payments, ensure compliance with Treasury Rules and Financial Instructions, etc.

In contrast to the FAO, the FA remains under the administrative control of the Finance Division and is paidfrom its budget. He exercises the powers of a Joint Secretary of the Finance Division in relation to the linedepartment(s) to which he is accredited, and (subject to appeal to the FA's superiors in the Finance Division) hisadvice is binding, although line departments have discretion in the areas of delegated financial powers.

The intention is to expedite decisionmaking between the Finance Division and line departments by channelingsuch decisions through a single point of contact, the FA. It is also intended that the FA should build up a closerelationship with the line department, being on hand to provide informal advice as well as making formal decisions onbehalf of the Finance Division. Key areas of FAs' involvement include reviewing proposals for supplementary grantsand reappropriations, as well as proposals for development expenditures. FAs provide the first level of review ofdepartments' annual budget proposals.

In keeping with their job title, FAs are expected to provide advice to the Secretaries of the line departments."In all matters of payment and matters affecting the accounts or any matters touching propriety and regularity of thetransactions, it is essential that the Principal Accounting Officer utilizes fully the services of the FA."

The FA system does expedite financial administration, inasmuch as most issues referred to the FA can bedecided by him/her without reference to other Wings of the Finance Division. The FA's proximity to the linedepartment helps to maintain and enforce the relatively centralized system of financial administration. However, the1992 Economy Commission, discussing the problem of ensuring that expenditures do not exceed budget allocations,observed that "the Financial Advisers who are meant to advise the Ministries and Divisions in the prudent conduct offinancial matters have for many reasons not been able, or perhaps not been allowed, to play their due role effectively."

3.08 Accountability. The existing systems for accounting, expenditure control, and audit fail todeliver adequate accountability, for reasons which relate both to the procedures themselves and tothe bureaucratic culture and environment in which they are applied. First, there is a focus onnarrow interpretation of rules and responsibilities. Attention to the letter of formal requirements isno guarantee that their spirit will be observed, and with fragmented responsibilities no one isaccountable for outcomes. The focus of auditing on transaction detail rather than effective overallcontrol is one manifestation of this approach. Second, bending of rules and failure to enforce themare widely accepted. For example, appointments "on detailment" are a common practice for whichthere is no regular authority.' The fact that Ministers may require officials to act outside the rulesis written into the rules themselves.2 Third, there is some ambiguity in the assignment ofresponsibilities for expenditure control. An important example is pre-audit, which has blurred thedivision of responsibilities between PAD and executive agencies and has encouraged lax financialcontrol by the latter. As long as PAD remains partly responsible for exercising control, executiveagencies cannot be made fully accountable. Finally, the lateness and ineffectuality of audits

1 An officer "on detailment" is employed against a post in one location but allowed to serve elsewhere. Thus ruralposts can be used to fund urban employees, and the scope for abuse is obvious.

2 A 1962 circular by the Ministry of Finance, which is still in the Revised System of Financial Control andBudgeting, allows that "The principle of personal answerability will not be applicable in a case in which a PrincipalAccounting Officer has been overruled by his Minister." (The Principal Accounting Officer is the Secretary of thedivision/department concerned.)

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weakens incentives to comply with financial regulations, and the inadequacies of the financialreporting system make it hard to impose management accountability for performance.

Box 3.3: Deficiencies in Accounts Classification and ReportingThe value of public expenditure information depends not only on its timeliness and completeness but also on

the clarity and uniformity of underlying expenditure classifications. In Pakistan's case these are often outdated anddesigned for financial control rather than expenditure management. Distinctions that should be clear in principle havebecome blurred in practice. Examples include the following:* The inclusion of work-charged and temporary staff in the maintenance and repair (conimodities and services) anddevelopment budgets, instead of in establishment charges, has made it difficult to distinguish between wage and non-wage expenditures. The provision of many benefits in kind further obscures the picture.* The development budget includes many projects which involve rehabilitation and repair, as well as quasi-recurrentexpenditures, so development expenditure cannot be equated with investment.

Some essential data either are not compiled by the spending agency or the Accountant General's office or areseriously deficient. For example, the complete object (i.e. economic) classification of actual expenditure is availableonly for the Federal and NWFP govemments; this classification is available for current expenditures only of Sindh,and no such information is compiled for Punjab and Balochistan. Similarly, data on sanctioned posts, actualemployment strength and wage bill of work-charged and temporary staff, the demographic profile of the public sectorwork force, and other employment-related information are either not available or are inadequate for effectivebudgeting and management of the wage bill. The Ministry of Finance and the provincial finance departments also lackinformation on the existing public sector asset base, making it difficult to allocate funds for O&M in an appropriatemanner. Similarly, no agency at the federal or provincial level has been maintaining complete and consolidatedinformation on the expenditures, employment, and financial flows of public sector corporations.

Information flows between spending entities and financial authorities are inadequate and, especially at theprovincial level, have deteriorated over the years. At present, the divisional offices of the line agencies are responsiblefor a significant portion of provincial public expenditures. Reports on these expenditures are compiled mainly byDistrict Accounts Offices (DAOs), but only on an aggregate basis for each spending entity, with no details on thefunctional and object/economic classification. The lack of administrative authority of the Accountant General, afederally appointed officer at the provincial level, with respect to DAO staff who are provincial employees, appears tohave resulted in less than smooth functioning of provincial accounting systems.

A Reform Strategy Based on a Medium-Term Expenditure Framework

3.09 Based on international experience, the reform of public sector management, and ofexpenditure management in particular, has several key elements. Reforms are intended to createincentive structures that encourage efficient use of public resources, while facilitating macrocontrol of aggregate expenditures. The incentive framework should reduce the uncertainty facedby sector agencies and individual managers, by giving them more explicit and credible resourceparameters (hard budget constraints) but allowing them greater discretion in deploying resourcestoward agreed objectives within those constraints. A crucial element is the adoption of a multi-year perspective for budgetary planning, together with emphasis on transparency and on holdingpublic sector agencies and managers accountable for results. There also needs to be a clear linkbetween broader strategies determined at the political level and administrative budgeting.

3.10 Reform of the present system in Pakistan needs to be based on a vision of the morefunctional PEMS that is aimed for, adapted to Pakistan's circumstances. A medium-termexpenditure framework (MTEF) is advocated to provide an integrating approach to the necessaryreforms. The MTEF is a strategic policy and budgetary framework within which line ministriesare given greater responsibility for resource allocation decisions, subject to medium-term resourceconstraints. The key to a successful MTEF is that mechanisms exist which assist and requirerelevant decisionmakers to balance what is affordable in aggregate and the policy priorities of the

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country. An MTEF is particularly relevant for countries that need to restructure their publicexpenditures and aims to:* improve macroeconomic balance by developing a consistent and realistic resource framework;* enhance the allocation of resources to strategic priority areas between and within sectors;* increase the predictability of both policy and funding so that sector agencies can plan ahead

and programs can be sustained; and* provide line agencies with hard budget constraints and greater autonomy, increasing incentives

for efficient and effective use of funds.

3.11 The MTEF is meant to ensure that the annual budget exercise is influenced by longer-termobjectives instead of being dominated by short-term expediency. It consists of a top-downresource envelope based on careful projections of fiscal revenues; a bottom-up estimation of themedium-term costs of existing government policies and public sector activities; and the matchingof these costs with available resources. Matching would normally occur in the annual budgetprocess. Conservatively defining medium-term resource envelopes for departments should helpchange the psychology of budgeting from a "needs" to an "availability" mentality.

3.12 In preparing an MTEF, decisions need to be taken in the right sequence and shouldcomnmand disciplined support at the political as well as administrative levels. The MTEF, to beupdated and extended annually, could be incorporated into a White Paper to accompany eachyear's budget. The Ninth Five Year Plan or a similar document could provide an initial strategicframework for the MTEF by setting out the broad roles of government in a market economy,stressing the need to prioritize and develop strategies within hard budget constraints, and puttingforward the concept of a multi-year public expenditure plan as the key way to operationalize thegovernment's strategy.

3.13 The overall MTEF approach, its main components, and the concrete steps to operationalizeand implement it need to be specified in more detail and adapted to conditions in Pakistan. Whilethis will require focused technical work drawing on institutional knowledge of Pakistan as well asinternational expertise, some of the key elements required to adopt the MTEF approach in Pakistanare discussed below.

3.14 Establishing the overall political and strategic framework for the MTEF. If the MTEF is toserve its intended purpose, politicians (legislature as well as executive) must buy into it. Theyshould have a transparent role in determining strategic government priorities, but this should beexplicitly linked to agreement on projections of sustainable public expenditure levels in the light ofrevenue projections and the requirements for macroeconomic stabilization. In this context, thesequential link from aggregate medium-term fiscal projections to the detailed annual budget needsto be firmly established. This requires that (i) the Cabinet should discuss and approve macroprojections and broad sector allocations before the detailed budget is prepared, and (ii)Parliamentary discussion of the budget should be preceded by debate on the MTEF White Paper.

3.15 There are many complaints about political interference in expenditure management inPakistan. However, it is important to distinguish between interventions that are legitimate anddesirable and those that are improper and/or dysfunctional. Politicians should, at both national andprovincial levels and in the appropriate fora of the National and Provincial Assemblies andCabinets, make decisions about broad policy parameters and priorities to guide the allocation ofpublic sector resources. A major weakness of the present planning and budgeting system is that it

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does not facilitate political guidance at this macro level, while public sector decisionmaking at themicro level has been influenced by highly specific political interests.

3.16 Developing the macroeconomic framework. Building a solid technical foundation for thefiscal revenue projections in the MTEF requires collaboration between the Ministry of Finance,Planning Commission, and State Bank of Pakistan. There needs to be a credible and transparentfiscal framework that draws attention to revenue and expenditure parameters (and their effect onthe economy) and forces decisionmakers to address trade-offs in expenditure allocations. The kindof approach used in preparing the National Resource Picture for the NFC Award (see Box 2.4 inChapter 2) provides a good starting point but should be further developed and systematized.

3.17 Reconsideration of appropriate roles for government. A major element in developing theMTEF would be to critically assess public expenditures in each sector and major subsector in thelight of sectoral objectives and the desired role of government. If this is done systematically,disconnects between sectoral expenditures and institutional structures on the one hand and sectoraldevelopment objectives and the appropriate roles of government on the other will becomeapparent. On this basis, expenditure cutbacks and reallocations can be programmed. For example,a matrix could be prepared for each sector, including: (1) sector characteristics and issues(including the existing network of public sector organizations and facilities/services); (2) specificgovernment objectives for the sector; (3) appropriate roles for government in the sector in the lightof these objectives; (4) implications for sectoral public expenditures; and (5) near-term actionsrequired. Such matrices would make explicit the objectives and assumptions underlyinggovernment programs and would provide the basis for public dialogue about the affordability andmutual consistency of activities undertaken by the public sector. It would also be important todefine clearly the roles of federal, provincial, and local governments in each sector/subsector tominimize overlaps and align funding with mandates at each level of government.

3.18 The review of government departments and other public sector entities carried out by theConmmlittee on Downsizing of the Federal Government in the summer of 1997 (see Chapter 2) wasa promising initiative and could serve as a useful input for the exercise outlined above.Eliminating obviously redundant activities and agencies generates savings and would sendimportant signals about the government's resolve. However, a quick one-time review cannot beseen as a substitute for a strategic approach over a longer period of time. Obvious cases forimmediate savings, where an entire agency can be eliminated, are likely to be few; more oftenthere will need to be a careful rethinking of how certain groups of services should be delivered.Second, a case-by-case review of agencies puts each in a stronger position to defend its ownexistence. Third, information for such a review may be difficult to obtain, and knowledgeableinsiders may not cooperate in the review, since it threatens their own organization's existence.

3.19 Preparing sector resource envelopes. In light of the overall projections of fiscal revenuesand sustainable levels of public expenditure and the sector-wise delineation of appropriategovernment roles, the aggregate expenditure projection should be broken down into medium-termresource envelopes for each sector and major subsector. Sector agencies would then be required toproduce costed and prioritized expenditure programs that fit within this resource framework. Thiswill require strengthening their planning and analysis capacity. The exercise should not leadmerely to "fairness" in spreading meager resources too thinly among many activities. There needsto be systematic analysis of the fully-funded costs of activities in each sector, so that the initial gapbetween funds "needed" and funds available is made explicit. This gap should then be addressed

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by focusing available public resources on a narrower set of activities that can be adequately fundedand by considering mobilization of funding from non-tax sources (e.g. greater cost recovery).

3.20 Integration of the recurrent budget and PSDP. It may be possible to move relativelyquickly to integrated budgeting of recurrent and development expenditures within the existing lineagencies. The medium-term aim should be to move toward comprehensive multi-year planning ofall sector expenditures (recurrent and capital), within sectoral resource envelopes. This could bereflected in the budget documents in different ways, but the key point is that affordable recurrentcosts should drive investment and not vice versa.

3.21 Improvements in accounting, expenditure control, and information flows. Planning andbudgeting take place in a vacuum unless there is good information for the analysis of expendituresand adequate controls to ensure that actual resource use follows what is planned. Hence furtherstrengthening of accounting and expenditure controls forms an integral part of the MTEF strategy.The MTEF document itself should identify priorities and monitor progress in this area. Inparticular, preparation of the MTEF will highlight the most serious deficiencies in budgetclassification and analysis and provide "consumer" input into ongoing programs of improvement,such as PIFRA. Statistical and accounting definitions should be uniform across differentgovernments and different types of government agencies.

3.22 Innovative approaches to service delivery. In the context of sector reviews, the governmentshould consider not only divestiture of inappropriate activities but also innovation in managementof core public services. There is scope to increase the effectiveness and efficiency of resource useby making managers more accountable for outputs as well as inputs and by involving beneficiariesmore directly. Innovations in school management and in irrigation are already moving in thisdirection, and the government should further explore ways to monitor the cost-effectiveness of itsactivities and create better incentive structures for public service delivery.

3.23 Finally, credibility is essential. The MTEF needs to be treated as part of a wider reformeffort to establish a "culture of compliance" with laws and regulations. At the same time, thereshould be a judicious review of regulations that relate to expenditure control to eliminateunnecessary "red tape" and move toward accountability for results rather than compliance definedstrictly in terms of detailed procedures to be followed.

3.24 An example of medium-term sectoral expenditure programming. The Social ActionProgram (SAP) represents the most important initiative so far in Pakistan to develop aprogrammatic medium-term approach to public expenditures at the sectoral level. (Theapplication of the SAP approach in education and health is discussed in Boxes 3.4 and 3.5.) TheSAP is intended to substantially improve Pakistan's low social indicators, which despite someprogress in recent years continue to lag significantly behind the averages for low-income countries,notwithstanding Pakistan's higher per-capita income. Total fertility and infant mortality rates are6.3 births per woman and 101 per thousand live births, compared with the averages for low-income countries of 3.6 and 64, respectively. The maternal mortality rate is about 300-400 per100,000 births, whereas low-income countries with good primary health systems have reducedthis figure to about 100. Pakistan's gross primary school enrollment rate of 60% comparesunfavorably with the South Asian regional average of 98% and the average of 105% for all low-income countries. Gender disparities in education remain large, with a girls' gross enrollment rate

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of only 49% (as against 69% for boys), compared to 91% in India and 105% in Sri Lanka andBangladesh. These indicators reflect Pakistan's long neglect of the social sectors.

Box 3.4: The SAP and Medium-Term Programming of Education Sector ExpendituresThe SAP seeks to improve Pakistan's low education indicators. Under the first phase, government spending

on education rose from 6.9% of total expenditures in 1990/91 to 8.6% in 1995/96. Budgetary expenditures on basiceducation have significantly increased, although their share in total recurrent education spending rose only slightly.Because enrollment patterns suggest that access and quality issues are closely related, the SAP also calls forimprovements in the quality of education through higher expenditures on non-wage operational inputs. This effort hasachieved only mixed success, however, and in 1997/98 such expenditures appear not to have been protected from theworsening fiscal situation in the provinces. Moreover, systemic problems have hampered the ability of line agencies tofully utilize the funds allocated.

The federal and provincial governments have attached high priority to achieving universal primary education(UPE) by the year 2006. This would require gross enrollments (i.e. of all children 5-10 years old) to increase byroughly two-thirds, a major challenge given Pakistan's fiscal and institutional constraints. While the bulk ofenrollment increases in rural areas will have to occur in government schools (since there are fewer non-governmentproviders), to approach UPE the government will need to consider appropriate cost-sharing mechanisms to encouragedevelopment of non-government providers both for the urban poor and in rural areas.

If enrollment growth is projected at a somewhat slower pace than implied by the 2006 target for UPE, it maybe feasible to sustain the effort both implementation-wise and in financial terms. assuming effective reforms and majorefficiency gains. Even if overall enrollments for grades K-5 are only targeted to increase from 65% to 76% for boysand from 42% to 59% for girls, and enrollments in grades 6-8 from 28% to 44% for boys and from 15% to 35% forgirls, the government will need to work on several fronts in order to be able to cover the associated costs.

Increasing the effectiveness of expenditures in government schools will require:* addressing teacher absenteeism and redeploying teachers to overcrowded schools;* limiting construction of new schools to those required to meet empirically verified demand;* providing funds on an annual basis for repairs supervised by parent-teacher committees;* providing all schools a standard package of instructional materials annually;* ensuring availability of textbooks for purchase at the beginning of the school year and that poor children have

access to free textbooks;* functioning parent-teacher committees in all schools to monitor teacher performance and manage non-salary

budgets; and* promoting the establishment of mixed schools with female teachers.

Even with these efficiency gains, spending on education will need to grow by 5-9% per year in real terms toachieve the less ambitious enrollment targets. Hence in addition to generally increasing its revenue effort to permithigher spending on elementary education, the government needs to consider: (i) somewhat greater cost recovery at theprimary and middle schooling levels for those who can afford it and (ii) sharply increased cost recovery in highereducation (i.e. upper secondary grades, colleges, and universities).

Because most of the children out of school are poor, sharply increasing enrollment rates requires governmentassumption of most of the long-term financing responsibility. Accordingly, modest user fees should be consideredonly for schooling financed by the government through non-government providers. In addition, parent-teachercommittees in government schools should provide local matching funds for the government's non-salary recurrentallocations disbursed through the committees. Given the substantial private returns to higher education, the currentvery low rate of cost recovery should be raised. Institutional consolidation -- instead of expansion as advocated by thenew Education Policy -- increases in student fees, and more rigorous scrutiny of universities' and colleges' fundingrequests would help create more fiscal space for elementary education spending. In addition, reduced course optionsin universities and enhanced professionalization of general colleges can contribute to cost savings and greatercorrespondence between university training and labor market demand.

3.25 The SAP since 1992/93 has put expansion of access to and improvements in the quality ofbasic social services (elementary education, basic health, rural water supply and sanitation, andpopulation/family planning) at the top of the government's development agenda, and spendingpriorities have begun to shift accordingly. In the second phase of the SAP (which was initiated in1997/98), the government has recognized that the highest priority for public funding in the social

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sectors must be accorded to activities which exhibit large positive externalities and effectivelycontribute to poverty reduction. The basic social services covered by SAP broadly correspond tothese criteria and therefore warrant high priority in government funding.

3.26 The SAP is based on five sets of program agreements developed by the federal andprovincial governments, in consultation with stakeholders and with the support of donors. Theseinclude (1) sector strategies; (2) policy reforms and progress indicators for each sector; (3) a five-year rolling public expenditure plan; (4) planned expenditures, their financing, and procurementplans for each subprogram; and (5) annual Operational Plans for each subprogram. The 27subprograms include three for the federal government (excluding RWSS), three for each province(excluding population), and three for each special territory (also excluding population). Bycombining four key sectors within the broader framework of basic social services, the SAP canfocus on cross-cutting problems that adversely affect the planning and implementation of socialservice programs (e.g. governance). The SAP also includes a strong monitoring and evaluationcomponent, and a certain degree of flexibility is built into the programming mechanism to allowimprovements and refinements as well as adjustments in response to changes in macroeconomicconditions. While the SAP has faced implementation problems, the program design andoperational mechanisms are largely consistent with the MTEF as sketched out earlier in thischapter.

Short-term Priorities

3.27 Short-term actions in the area of public expenditure management need to be consistent withaddressing the deeper systemic problems. Inevitably there will be some tension between short-term expenditure controls on the one hand and the longer-term effort to restructure the PEMS onthe other. For example, expenditure controls have been tightened in the recent past and to someextent centralized, whereas the desirable direction of reform in the medium term is a programmaticand sectoral approach, with greater authority vested in sector agencies and program managers(subject to clear and firm budget constraints), along with accountability for outputs and outcomes.

3.28 A number of near-term measures are needed to prepare the way for the MTEF and integrateit with annual budgeting and development planning, including, among others, the following:

* capacity-building to enable the technical work on fiscal revenue projections and the medium-term fiscal resource framework to be carried out in a timely manner;

* adjustments in the MTEFlbudget process to ensure that there is an appropriate degree ofpolitical involvement and commitment in the determination of medium-term and annualresource envelopes for public expenditures and in setting broad priorities; and

* as part of initiation of the MTEF exercise, a systematic reconsideration of the appropriate rolesof government in each sector and major subsector, comparison with current governmentactivities, and drawing out of broad implications for sectoral programs and expenditures.

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Box 3.5: The SAP and Medium-term Programming of Health Sector ExpendituresTotal government expenditure on health remained roughly constant as a percentage of GDP at around 0.76%

between 1991/92 and 1996/97 (0.82% of GDP if population welfare is included). However, SAP has been successful inraising the priority given to primary health within the health sector. SAP health expenditure as a share of total govemmenthealth spending rose from 40% in 1993/94 to 54% in 1996/97. SAP has been less successful in increasing non-salaryrecurrent spending in the SAP health sector, which was approximately constant in real terms during the first three years ofSAP (through 1995/96) and declined slightly as a share of total SAP health recurrent spending.

In Pakistan, some four-fifths of the total burden of disease (BOD, which measures losses of healthy life due to allepisodes of disease and injuries in a given year) is accounted for by communicable infectious diseases, reproductive healthproblems, nutritional deficiencies, injuries, and cardiovascular disease. Thus Pakistan is still at an early stage in theepidemiological transition, with preventable diseases that affect primarily young children and women of reproductive ageaccounting for a dominant share (about 52%) of mortality and morbidity. Effective prevention and treatment interventionsare available, which generally require only modest levels of skills and resources. Dramatic improvements in health statuscan be achieved in Pakistan if such interventions are more widely applied, including: (i) standard public health measuressuch as health and nutrition education, provision of clean water and sanitation, and food fortification; and (ii) high-priorityhealth services including immunization, drug therapy for treatment of tuberculosis and malaria, and maternal and childhealth care programs (family planning, pre- and post-natal care, deliveries by trained personnel, and management of thesick child - especially diarrhea and acute respiratory infections).

Most of the high-priority health services listed above can be provided in a cost-effective manner through first-level health care facilities linked to community-based health workers and backed by referral services in secondaryhospitals. Provision of clean water and sanitation, especially for rural areas, has been emphasized under the SAP and willcontinue to figure prominently in the second phase of SAP. The role of government as provider of high-priority healthservices is critical in rural areas, where the private sector mainly comprises untrained health care providers. Even in urbanareas, where the bulk of trained private sector providers are located, there is a role for the government to providesecondary hospital care for catastrophic illnesses/injuries, since most households do not have access to health insurance.

Assuming constrained fiscal scenarios, under which overall health expenditures would grow at no more than 5%Cper year in real terms, non-SAP health expenditures may have to decline in real terms, or SAP health expenditures wouldgrow more slowly than desirable. Specific options for savings in health expenditures include:* reduction of overstaffing, especially of general medical officers and non-technical support staff;* elimination of school health programs whereby doctors are posted in schools (teacher-based health education in

schools would be more suitable);* ensuring that badly-sited facilities (many constructed under block allocations controlled by politicians in the past)

are not made operational; given low utilization rates, there is also tremendous scope for expanding access tohealth services with currently available facilities, provided that quality can be improved.

Health spending envelopes could increase faster if there is greater cost recovery for government health services(and health facilities are allowed to retain the proceeds). There are, however, potential risks as well as benefits fromraising currently low user charges. If the poor are not exempt, many of them might stop using government facilities andresort to untrained providers or self-care. Second, discrimination against women/girls in households' health careexpenditure could increase. Third, for catastrophic illnesses and injuries, recovery of a large share of treatment costswould be problematic given the absence of widespread health insurance. Hence any changes in cost recovery policywould need to be based on careful analysis and perhaps piloted in a few districts. A good starting point may be drugcharges. Drugs are now dispensed free in government facilities, but they are severely rationed, with no transparentallocation criteria. An alternative would be for patients generally to pay for their drugs, with exemptions for poor patients,patients with highly communicable diseases which are expensive to treat (e.g. tuberculosis), and inpatients suffering fromcatastrophic illnesses/injuries.

3.29 Building on the promising experience with the SAP as well as the sector-based expenditureprogramming that is being initiated in the agricultural and irrigation/drainage sectors (the latterthrough the National Drainage program), sectoral pilots for instituting the MTEF approach can bedeveloped. Such sectoral initiatives need to be carried out in the context of an overall resourceenvelope based on a careful assessment of the fiscal situation and prospects. Hence it is essentialalso to move forward with this part of the MTEF process in a timely manner.

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3.30 Other short-term measures to improve the PEMS in Pakistan, which would be consistentwith and facilitate more comprehensive MTEF-based reforms, include the following:

* Undertaking a thorough review of the recurrent expenditure implications of the existingpipeline of development projects and the portfolio of projects under implementation.

* Similarly (but over a longer time horizon), developing an inventory of existing public sectorassets and service networks to assess their full operating costs, which would permit an analysisof the affordability of current government roles and activities.

* Integrating the budgeting of recurrent and development expenditures, initially within theexisting line agencies but over time increasingly on a sectoral basis as well.

* Improving the fiscal reporting system through development of computer-based financialaccounting systems to supersede existing manual systems.

* Moving rapidly to separate PAD's auditing and accounting functions; also rationalizing theinstitutional structure and methods of fiscal accounting in the provinces.

* Developing an integrated approach to budgeting of foreign assistance, including use of realisticestimates of foreign aid inflows in the PSDP, full incorporation of such flows into theprovincial ADPs and budgets, and inclusion of aid-supported activities in the reconsiderationof the role of government at the sectoral/subsectoral level suggested above.

* Strengthening the accountability of line agencies for expenditure control within authorizedappropriations, and reconfirming that they rather than PAD or the FAs are responsible forexpenditure control.

* Specific measures to improve the quality of information, including:* regular, timely collection/compilation of essential public sector employment data;* uniform compilation by all provinces of budgetary expenditure data on object (i.e.

economic) classification for both current and development spending;* ensuring that all types of budgetary expenditure data are readily available on uniform

classification for current and development spending; and* development of a financial database for public enterprises to facilitate their inclusion in the

broader medium-term fiscal framework.

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4. TOWARD A LEAN, EFFECTIVE CIVIL SERVICE1

4.01 Pakistan's civil service, though not particularly large or costly by international standards,has been taking up an increasing portion of the shrinking fiscal space left for non-defense, non-interest expenditure, squeezing non-wage spending. Moreover, generous pension provisions will,if left unchanged, result in sharply rising pension costs when large cohorts retire in coming years.More important than the direct cost of the government establishment is its lack of effectiveness infulfilling the roles assigned to it. The civil service is handicapped by an inappropriate skills mixresulting from the state taking on the role of directly providing employment to the society; a rigid,overly centralized management structure with antiquated rules and regulations; lack of incentivesfor effective performance; lack of accountability to beneficiaries and the general public; andwidespread politicization, corruption, and demoralization. Hence the civil service needs to bethoroughly reformed and modernized. A comprehensive approach to civil service reform requirescareful design and preparation as well as consensus and strong political leadership in order to besuccessful. While developing such a strategy, consistent progress can and should be made in theshort run through measures to stop abuses and redress irregularities.

Trends in Public Sector Employment and Pay

4.02 Available information on public sector employment, summarized in Table 4.1, isincomplete and not fully consistent across different parts of the public sector or over time.2

Nevertheless, it is clear that total public sector employment has been growing in recent yearsdespite the imposition of hiring freezes at various times. (The federal corporations, whoseemployment has declined as a result of privatizations and staffing reductions, are the exception.)

4.03 At around 2% of the total population and 7% of the labor force, public sector employmentin Pakistan is not large by international standards - the government employment/population ratiowas 2.1-2.2% in Singapore, Indonesia, and the Philippines in the early 1990s and 3.0% in SriLanka in 1996. However, the bulk of public sector employment growth in Pakistan has takenplace at low skill levels (Basic Pay Scales -- BPS 1-6), where there is substantial overstaffing.Moreover, the government wage bill has been growing rapidly in the 1990s - by 15% per year innominal terms in the federal government and nearly 20% per year in the provinces (see Table 4.2).This rapid growth is mostly accounted for by (i) automatic progression of staff salaries upwardthrough annual increments that are part of the salary structure (see para. 4.13) and (ii) increases insome allowances. The underlying pay structure has risen more slowly than inflation - theminimum basic salary for BPS level 1 rose by 7.6% per year in nominal terms between 1987 and1997, while the maximum basic salary for level 22 rose by 7.3% per year during the same period.

1 This chapter in part draws on the findings of a World Bank mission which visited Pakistan during February 7-26,1998 to prepare a study of civil service reform.

2 Various agencies collect public sector employment statistics, with little integration or consistency of information.In addition to persons employed against sanctioned posts (for which statistics are available), substantial numbers ofcontingent, ad-hoc, temporary, and work-charged staff are employed on a needs basis and are paid from various non-establishment budget heads (e.g. contingency funds, development budget, and maintenance and repair budget).Statistics on employment in provincial public enterprises are not available (although this is relatively small).

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Table 4.1: Structure of Government Employment1988/89 1993/94 1996/97

Employment % of Total Employment % of Total Employment % of Total

Federal Government 491,145 22.1 452,141 18.2 662,000 23.7

Provincial Government 1,284,006 57.8 1,586,081 63.7 1,708,014 61.1

Punjab 722,916 32.5 818,647 32.9 880,781 31.5

Sindh 285,042 12.8 424,974 17.1 445,577 15.9

NWFP* 177,106 8 219,539 8.8 254,587 9.1

Balochistan 98,942 4.5 122,921 49.0 127,069 45.0

Total Government 1,775,151 79.8 2,038,222 81.8 2,370,014 84.8

Federal Corporations 448,185 20.2 452,283 18.2 424,073 15.2

Total Public Sector 2,223,336 100 2,490,505 100 2,794,087 100

* Fig for 1988/89 extrapolated backwards.

Source: Federal govemment figures are from various civil servants' censuses; provincial figures are from provincial govemments and budgetdocuments; and public corporation figures are from 1996/97 Report of Task Force on Restructuring of Public Sector Corporations.

4.04 The provinces account for 61% of total public sector employment, while the remainder isdivided between the federal government (about 24%) and federal public enterprises (15%). Thebulk of civil servants are concentrated in the lower grade levels (BPS 1-6 and to a lesser extent 7-15), whereas only a small proportion are in the senior professional and managerial grades (16-22).In the provinces in 1996/97, the respective proportions of the total number of sanctioned postswere 69.2% in BPS 1-6, 21.0% in BPS 7-16, and 9.8% in BPS 16-22. Teachers and other social

3service providers comprise the largest single category of civil servants.

Organization and Management of the Civil Service

4.05 The formal structure of Pakistan's civil service has not changed greatly from colonialtimes. It remains closed, centralized, and strictly controlled, in theory, by multitudinous rules andregulations. Once admitted to a particular cadre (District Management, Secretariat, Accounts,Taxation, Customs, etc., as well as technical cadres), staff progress on the basis of seniority. It isdifficult to bring in needed skills and expertise from outside. Mobility among positions isrestricted. Senior officials belong to an elite corps of generalists who are managed separately andfrequently transferred from post to post. There are no formal written job descriptions.

4.06 The system's potential virtues - appointments on merit, strict enforcement of rules,objective, arms-length decisionmaking on promotions, etc. - have been undermined by patronage,abuse of discretionary powers, and corrupt practices. Personnel decisions have been subjected topolitical interference. The lack of attention to rewarding merit, combined with the virtual absenceof mission statements, targets, or expected outcomes based on which performance could bejudged, contributes to a general lack of incentives for good performance and accountability. Whilemeticulous personnel records are kept for civil servants, annual performance evaluations havebecome virtually meaningless.

3 For example, in 1996/97, 64.5% of Punjab's 891,000 provincial government employees were working in the socialsectors, including 54.6% in education. Other important categories included law enforcement (13.2%), agriculture andirrigation (8.8%), and general administration (2.4%).

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Table 4.2: Establishment Cost of the Government, 1990/91-1995/96(Rs million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 Avg. AnnualActual Actual Actual Actual Actual Actual Growth (%)

National 34,900 45,481 52,335 59,470 68,612 82,448 18.8

Federal 8,051 9,446 10.988 12,336 13,413 16,263 15.1

Provincial 26,849 36,034 41,346 47,134 55,199 66,184 19.8Punjab 13,933 18,760 22,292 25,361 28,149 34,502 19.9Sindh 6,935 9,331 10,237 11,824 15,076 17,096 19.8NWFP 3,936 5,191 5,630 6,304 7,737 9,530 19.3Balochistan\1 2,045 2,753 3,188 3,644 4,236 5,057 19.8

\1 Estimated from employment (sanctioned posts) data and average employment cost in other provinces.Source: Federal, Sindh and NWFPfigures are from the Appropriations Accounts; Punjabfigures were

provided to the mission by Punjab governnient.

4.07 Overcentralization and suboptimal division of responsibilities - between federal,provincial, and local governments on the one hand and between the public and private sectors onthe other - have complicated civil service management, exacerbated rigidities, increased thedistance between decisionmakers and beneficiaries, and reduced accountability. Significant publicsector production of goods and services distracts the civil service from core government roles.Civil servants are managed in a uniform manner, based on federal government norms, throughoutthe federal and provincial governments, which introduces considerable rigidity into the system.

4.08 Another problematic aspect is that government departments at both federal and provinciallevels are characterized by a dual structure of Secretariat and Directorate. In theory the Secretariatis supposed to deal with core administrative functions and with policy and planning, while theDirectorate implements programs and delivers services. In reality, however, there is oftenconsiderable overlap, duplication, and confusion of roles which results in excessive overhead.Related to this bifurcation, an elite generalist cadre (formerly the Civil Service of Pakistan, nowthe District Management and Secretariat Groups) dominates the higher echelons of the federal andprovincial civil services. Selected on the basis of competitive examinations, they usually have notechnical expertise in the departments where they operate. The system fuels resentment amongspecialized civil service cadres and lack of cooperation which detracts from work effectiveness.

4.09 Monitoring numbers of staff and their emoluments - essential for effective personnelmanagement - suffers from serious shortcomings. Payroll administration is fragmented andantiquated. Cross-checking and control of establishment against authorized posts for the most partcan only be performed manually, providing ample scope for errors or irregularities. Moregenerally, data on the outputs and outcomes of public expenditures are sorely lacking, severelyhindering monitoring and evaluation of public sector and civil service performance.

4.7 Governance issues (including widespread politicization and failure of accountabilitymechanisms) are pervasive in the civil service. The extent to which problems of bad governanceaggravate the other difficulties of the civil service adds a special dimension to the need for reform.One particularly damaging aspect of governance problems is widespread corruption. While not thesole or primary factor behind these problems, the civil service is seriously compromised bycorruption which has now become ingrained in its behavior, norms, and practices.

Pay and Benefits

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4.11 Public sector employees in Pakistan are compensated by a package comprising a basicmonthly salary, a variety of cash allowances, benefits in kind, and pension benefits uponretirement. Base pay for the vast majority of government employees is according to a single payscale (BPS 1-22). There are numerous different cash allowances, for diverse items such as cost ofliving, housing, medical expenses, commuting, etc. There are also important non-cash benefits,especially for civil servants in the upper grades, the most significant of which is housing. At thehighest grade levels the value of cash and in-kind benefits can be as much as 400% or more ofbasic salary. This greatly reduces the transparency of the civil service pay package.

4.12 Pensions for civil servants are based on years of service and the final year's basic salarylevel (plus certain allowances). A unique feature of the pension system is the extremely generouscommutation provision, under which retiring civil servants are allowed to convert half of theirmonthly pension into a lump sum, calculated on the basis of life expectancy at time of retirementwith no discounting of future payments brought forward. As a result, more than half of federalbudgetary expenditures on pensions in any given year are for commutations to currently retiringgovernment employees. The total annual cost of civilian pensions to the federal and provincialgovernments is conservatively projected to rise from an estimated 0.6% of GDP at present to 1.6%of GDP over the next two decades if there are no changes in pension provisions.

4.13 Civil service pay is supposed to be reviewed by Pay and Pensions Committees constitutedby the government from time to time (the last one in 1994). These reviews have resulted in amajor compression of pay over the past several decades. Base pay at level 22 was more than 20times that at level 1 in 1972, whereas today the gap is less than 10 times. Staff automatically''move-over" to the next higher grade within two years after they have reached the maximum ofthe pay scale for their existing grade. The combination of automatic move-overs and paycompression has weakened incentives and overall pay control.

4.14 Civil service pay superficially appears low compared with the private sector, but undercurrent labor market conditions there are numerous qualified potential recruits for entry-levelpositions. However, it is difficult to retain skilled and well-trained staff in government service,and the government finds it hard to attract top-quality managerial and technical personnel at theupper end of the grade structure. This suggests the need to develop special arrangements to recruitsenior persons with required skills (e.g. short-term contracts of no more than two years with clearterms of reference, at pay scales related to pay levels in the private sector, and no pensions).4 Athorough survey of private sector pay for comparison purposes also is needed.

4.15 Throughout the world, traditional, centralized personnel management systems with theirunified pay scales and fixed-step increments are being reformed. They are perceived to beinflexible and de-motivating, with little incentive for staff or managers to acquire new skills ordisplay initiative. The government needs to study other countries' reforms and consider how itspresent system could be made more flexible, and pay and promotion policies more merit-based.

Lessons of Experience with Civil Service Reform

4 This is already occurring occasionally, with terms set in an ad-hoc manner. It would be desirable to systematize thispractice, with clear guidelines to ensure transparency.

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4.16 Civil service reform is a complex and difficult exercise, which may take years to plan andto put the basic building blocks in place. Yet often governments are suddenly faced with strongpressures to achieve cost savings quickly by streamlining organizations and shedding staff,particularly in times of fiscal crisis. The lessons of international experience show, however, thatcareful planning is needed (see Box 4.1). Even in the case of urgent actions, a study of availableoptions must be carried out in order to avoid mistakes and/or setting of unfortunate precedents.

Box 4.1: Planning for Civil Service Reform: Malaysia and UgandaAlthough the circumstances under which reforms were launched differed, the experiences of Malaysia and

Uganda both demonstrate the importance of defining goals, ensuring sustained commiitment from the highest levelsover the long haul, devising a strategic plan, and setting up appropriate institutional arrangements. In both cases thereforms were deemed essential to meeting the govemments' goals. The reforms were driven from the top: the PrimeMinister of Malaysia and the President of Uganda took a keen personal interest in these programs, chaired the relevantcommittees, and were responsible for sustaining the momentum of the reforms.

In the case of Uganda, the reforms were outlined in a document entitled "Vision, Objectives, Strategy andPlans." The objectives were to improve service delivery, efficiency, and effectiveness, through the creation of a small,better paid, and more effective service where staff would be fully accountable and where clear, simple, and consistentrules and procedures would be applied.

In the Malaysian case, the govemment started its first phase of reforms in 1965 with a clear definition of therole and nature of the public sector transformation it wanted to achieve. For this purpose, the DevelopmentAdministration Unit and a training center were created. Activities carried out included reorientation of structure andorganization - some units were decentralized, others left under strong central control; a thorough refonn of personnelmanagement and remuneration; and introduction of a new budget management system to enhance transparency andaccountability of units and managers.

4.16 Pakistan's own recent experience highlights the need for a comprehensive approach and forcareful design and preparation of civil service reforms. For instance, the untargeted, voluntary"Golden Handshake Scheme (GHS) introduced in August 1997, under which federal governmentemployees could opt for early retirement with enhanced benefits, was shelved because of inabilityto cover the cost of departure payments and in the face of parliamentary and labor opposition (seeBox 2.3 in Chapter 2). Moreover, the combination of the GHS and the pension commutationprovision meant that the incentive to retire was greatest for younger mid-career staff, whichprobably would have been sub-optimal and almost certainly was not intended. In sum, the GHS isa good example of the problems which can arise when.major civil service reform measures arerushed into without taking all ramifications into account.

4.17 Another lesson from Pakistan's recent experience is that coordination is essential, and thatthere needs to be a focal point to provide the impetus and follow-up needed to move ahead withreforms as well as to ensure overall coordination and consistency. Numerous committees andgroups are working on different aspects of civil service reform; although efforts are being made tocoordinate them, there is room for improvement. The importance of wholehearted support fromthe top political level cannot be overstated in this context, as well as the need to build a broadnational consensus on the desirability of civil service reform and its main directions. A reformleadership cell, led by someone of suitable stature and playing a coordinating role, could facilitateboth political commitment and consensus building.

4.18 Experience has shown that the design and implementation of programs for voluntary and/orinvoluntary departure of government employees from service can be very difficult and challenging

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yet crucial for the overall success of civil service reforms. Departure programs should not bepursued merely for cost reduction but as part of a comprehensive civil service reform program, soas to reduce the risks of skill reduction, recurrence of overstaffing, and staff demotivation. Keyissues in this respect include the need for clear objectives, careful preparation (includingestablishment of effective personnel and wage bill monitoring mechanisms), and well-designed,targeted departure packages which balance the need to provide adequate financial compensationwith fiscal constraints. To avoid the adverse selection problem, a "menu" of self-selectingmechanisms can be used to create incentives for needed/more productive workers to remain in thecivil service and for unproductive workers to leave. Labor market data can be used to tailordeparture packages to observed characteristics of workers (e.g. age, education, family status, etc.).Staff eligible for enhanced early retirement need to be distinguished from those who would receiveseverance pay. A logical starting point for targeting of redundant employees in Pakistan could bethe "surplus pool" and redundancies identified by the Commission on AdministrativeRestructuring (CAR) in its reviews of federal government ministries and divisions.

The Way Forward

4.20 Pakistan should take a two-pronged approach to move ahead with the formidable agenda ofcivil service reform. Extensive work is required to design a comprehensive reform package withappropriate sequencing and to build up the required broad political consensus for reform. Ongoinginitiatives like those of the CAR can be brought to fruition and followed up by developing adetailed reform program. At the same time, immediate measures should be taken to stop abusesand redress existing irregularities in public sector employment, the wage bill, pension provisions,and civil service management. The most obvious opportunities for savings through staffreductions should be exploited as well (in line with recommendations by the Committee onDownsizing of the Federal Government and the CAR).

4.21 Preparing for comprehensive civil service reform. Reform has to be based on strongpolitical leadership and a broad consensus on the appropriate roles of government and the civilservice. As mentioned earlier, good reform design and a broad political consensus are bestachieved by forming a high-level focal point or reform cell to take the lead in both technical designwork and consensus-building. This should include broad representation and should not bedominated by civil servants (serving or retired), some of whom would naturally be expected toresist reform. Reform design and phasing need to take into account the interest groups that will beaffected by changes, and to ensure that there are concrete gains for the society and for the publicsector in the early stages to help strengthen the consensus in favor of reforms. A comprehensivecivil service reform program should encompass at least the following broad areas:* pay and benefits;* pensions;* personnel management;• recruitment practices;* career and promotion patterns;* the rules of business;* relationships among different civil service cadres;* relations between civil servants and politicians;* mechanisms to deter and punish corruption; and* broader substantive accountability to beneficiaries.

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4.22 Near-term options. Recommended short-term actions to improve civil service managementand functioning are outlined below. Such measures will result in significant improvements and arefully consistent with the overall direction of civil service reform.

* Putting in place an integrated management information system for public sector employmentand personnel expenditures; carrying out provincial civil servants' censuses and publishing theresults of the 1997 federal civil servants' census.

* Undertaking payroll audits to remove ghost workers and pensioners.

* Initiating a major effort to gather data on pensioners and prospective retirees.

* Maintaining and tightening recruitment freezes (except for front-line staff in SAP sectors and,on an exceptional basis, to obtain essential skills).

* Observing existing rules on minimum time in postings for middle- to senior-level officials,with less frequent rotations and transfers which hinder work effectiveness.

* Stopping new work-charged employment (which has been used to circumvent existingemployment bans and/or to make politically-motivated appointments).

* Terminating all ad hoc appointments and contractual appointments at the end of the contractperiod, with all future contractual hiring to be on the basis of specific terms of reference.

* Denotifying all unfilled sanctioned posts which have remained vacant for more than one year.

4.23 Actions along these lines will both prepare the way for comprehensive civil service reformand generate some momentum for change and thereby support the consensus-building process.The federal government is already beginning to implement some of these measures and iscommitted to others. The provinces also need to join this effort, since the bulk of civil servants areat the provincial level. Finally, in line with the restoration of elected local governments, transferof responsibility for localized social and other public services to local governments should beactively pursued - initially on a pilot basis - and at the same time local capacity (technical,administrative, and resource mobilization) should be built up.

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5. ADEQUATELY FUNDING AND BETTER MANAGING O&M

5.01 Pakistan's spending on operations and maintenance (current expenditure on maintenanceand repair of capital assets and on operation of service networks) has long been inadequate. Thisis particularly true of non-wage O&M, where the gap between needs and spending has greatlywidened over time. Despite increasing awareness of O&M issues, the situation has continued todeteriorate in many sectors. Remedies are urgently needed to avoid worsening breakdowns in thedelivery of infrastructural services and to improve the quality of basic social services.

Key Cross-cutting Issues

5.02 Two sets of factors are responsible for generic O&M problems in Pakistan: (1) currentinstitutions, incentives, and fiscal constraints militate against adequate budgeting, spending, andmobilization of resources for O&M, and (2) institutional and other weaknesses reduce theeffectiveness of O&M spending.

5.03 Institutions. Pakistan's planning and budgeting systems are biased against adequatebudgeting of O&M. The lack of integration of the development and recurrent budgets and theseparation of functions between the Planning and Finance departments adversely affect O&M.Although the recurrent expenditure needs of new projects are assessed during the approval processfor these projects' inclusion in the PSDP, in the past projects were nonetheless initiated withoutfirst adequately budgeting for the recurrent expenditure needs of completed ones. New, rather thancompleted, projects drove budget preparation, resulting in overextension of infrastructure andservice networks in relation to financial capacity. The government's recent initiatives to stem theproliferation of new projects are in the right direction and should ultimately help shift the focus ofbudget preparation to the needs of on-going and completed projects.

5.04 The same level of justification is not required for recurrent expenditures as in the case ofthe PSDP (see Chapter 3). The incremental approach to budgeting of current expenditures in mostsectors (with reference only to the previous year's spending plus a certain nominal increase) resultsin inadequate scrutiny, making it more difficult to minimize low-priority spending and create fiscalspace for essential O&M. Finally, the infrequent revision of maintenance yardsticks - which aremeant to provide a basis for budgeting O&M - results in grossly deficient budgetary allocations.Also, O&M yardsticks would be more meaningful if broken down between wage and non-wagecomponents.'

5.05 Incentives. The incentive structure of the public expenditure management systemdiscourages adequate spending on O&M. Sectoral line agencies cannot reappropriate savings intheir salary budgets to other uses, so they are not inclined to generate such savings to better fundnon-wage O&M needs. Receipts from user charges in most cases must be surrendered to the

1 However, pursuing the revision of yardsticks in some sectors (e.g. irrigation and drainage) has not resulted in moreadequate O&M funding because these are often contested and are not adhered to by finance departments in budgetingdecisions. Moreover, the use of such yardsticks can introduce rigidity concerning the combination of inputs appliedand staffing requirements (see para 5.09). Instead, O&M performance contracts with the private sector areincreasingly being used as a pragmatic solution in irrigation and drainage (see paras. 5.15-5.17).

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general treasury (which may not allocate sufficient funds for O&M in any case), so sector agencieshave little incentive to increase cost recovery. Fear of antagonizing vested interests or adversepopular reaction (as in the case of irrigation water charges or fees for higher education) mayfurther discourage efforts to increase cost recovery.

5.06 Fiscal constraints. O&M tends to be disproportionately penalized by fiscal constraints. Astotal expenditures become progressively squeezed, resources for non-wage O&M are increasinglyencroached upon by agencies striving to maintain employment or to circumvent hiring freezes andcontinue taking on work-charged and other non-sanctioned employees. Moreover, initiation ofnew projects (and thus creation of new, albeit theoretically temporary, posts) may be moreattractive to line agencies than adequately budgeting for non-wage O&M. Deferring routine O&Min order to engage in development projects results in higher future claims on budgetary resourcesand also increases costs, since major rehabilitation (to address the problems of run-downinfrastructure facilities) is substantially more expensive than regular maintenance.

5.07 Ineffectiveness of O&M spending. Even when resources are available for O&M, weakinstitutional capacity, lack of accountability and market discipline, and governance problemsrender them less than fully effective and reduce their impact. In many cases incentives toeffectively manage O&M are weak, as the agencies concerned do not bear the cost of inadequateO&M and on the contrary may even benefit (if, for example, the end-result of poor O&M is amajor rehabilitation project or a new investment project).

5.08 Technical capacity is limited in the specialized maintenance agencies of the federal andprovincial governments - the Pakistan Public Works Department and provincial Communicationsand Works (C&W) and Public Health and Engineering (PHE) departments - yet governmentdepartments are generally required to utilize their services rather than being allowed to contract outwork to the private sector. The large work-charged staff retained by the specialized agencies forroutine maintenance may not always be suited to the tasks at hand, resulting in inferior work andreduced cost-effectiveness. On the other hand, one experiment involving a department creating itsown engineering cell to carry out maintenance work ended in failure, and it was forced to return tothe C&W department for maintenance services while still retaining the engineering cell.Contracting out the bulk of maintenance to the private sector is a promising option to avoid theseproblems. There are many examples of the cost-effectiveness of private sector contractors (andcommunity organizations) compared to government agencies. While such approaches arebecoming increasingly common, the bulk of O&M services continues to be provided by publicagencies. Competitive bidding or other similar devices to promote competition and transparencyin the contracting process are necessary to avoid governance-related problems.

5.09 Another problem is use of outdated technical methods and rigid approaches in O&M work.Norms for O&M should not be applied in an overly rigid manner but rather flexibly, with theobjective of maximizing efficiency and cost-effectiveness. Outdated knowledge of staff is yetanother common problem, which can result in sub-optimal maintenance strategies.

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Sector-specific O&M Issues

5.10 O&M trends and issues in three sectors - agricultural research and extension, irrigation,and roads - are briefly reviewed below.

5.11 Agricultural research and extension. Pakistan's agricultural research and extensionservices are highly fragmented, suffering from significant overlaps in functions, overstaffing,inadequate levels of operational funding, and weak impact on farmers. At the federal level,various research institutes as well as agricultural universities and colleges are responsible for long-term research, coordination, and planning. A large number of provincial research institutes aremainly engaged in adaptive and applied research. Punjab alone has 20 research institutes andcenters, including various crop, soil, and climate/zone-specific institutes.

5.12 With such a large, overextended network, it is not surprising that O&M and especially non-wage O&M have suffered from progressively worsening funding shortfalls in the face of fiscalconstraints. An estimated 90-95% of federal recurrent expenditures on agricultural research nowconsist of establishment charges (compared to the normative percentage of 40%, and 59% ofactual recurrent expenditures in the Pakistan Agricultural Research Council system in 1992).Development spending (which also funds some O&M) has been on a declining trend. Moreover,some staff have been transferred to the development budget, as a result of which about 10% ofdevelopment allocations for agricultural research now consist of wage costs.

5.13 A similar situation prevails in the provinces. In Sindh, establishment charges now accountfor over 90% of recurrent expenditures on agricultural research and extension. In Punjab, totalbudgetary allocations for agricultural research declined by almost 19% in real terms between1991/92 and 1996/97, while the share of establishment charges in the total rose to more than 80%(Table 5.1), compared to the 40-50% believed to be ideal. In agricultural extension, establishmentcharges rose from 84% of total allocations in 1991/92 to 88% in 1996/97. In some parts of theextension system (e.g. locust control), establishment charges account for more than 96% of totalspending. Officials estimate that only about 50% of the non-wage operational needs of theagricultural extension system are being met.

5.14 The key to resolving O&M problems in agricultural research lies in reducing theduplication between federal and provincial institutions and restructuring/consolidating those thatremain. While some research may need to be site-specific, this is not always true. For example,there appears to be substantial scope for reducing duplication between federal and provincialefforts in cotton research. Since extension workers are practically bereft of operational funds, verylittle interaction with farmers actually takes place, as transportation is essential for this purpose.Based on a careful inventory of staffing levels, a significant reduction in the scope of extensionactivities should be considered, so that limited funds can be put to more effective use. Options forprivate sector provision of some extension services also should be explored.

5.15 Irrigation and drainage. The age and deferred maintenance of Pakistan's extensiveirrigation and drainage network have resulted in massive rehabilitation needs to reducewaterlogging and salinity, the principal threats to the sustainability of agricultural production. Thepersistent large gap between water charges and operating costs (along with surrender of water

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charges to the common revenue pool) constrains resources for O&M. Moreover, rapid increases inestablishment charges have further squeezed non-wage O&M.

Table 5.1: O&M Allocations for Agricultural Research and Extension in Punjab Province1991/92 1996/97

Agricultural Research

Establishment Charges as % oftotal O&M allocations for agri. research 76.8 80.7

Other as % of total O&M as % of totalO&M allocations for agri. research 23.2 19.3

O&M allocation for agri. research,constant 1989/90 prices (Rs million) 169.0 137.2

Agricultural Extension*

Establishment Charges as % of totalO&M allocations for agri. extension 83.8 87.9

Other as % of total O&M allocationsfor Agri.Research 16.2 12.1

O&M allocations on agri. extension.1989/90 prices (Rs million) 222.2 232.3

* Data for first year relate to 1992/93.Source: Government of Punjab, Department ofAgriculture.

5.16 On average, the provinces allocated 26% less than required for O&M during 1990-92,while cost recovery fell short of O&M expenditures by an average of 38% in 1988-92. By1995/96, the shortfall between O&M requirements and needs in Punjab had fallen to less than 9%.However, the increased expenditures have been misdirected, with higher spending than warrantedon public tubewells and lower O&M expenditures on canals. Moreover, much of the increase inO&M spending in the early 1990s is explained by higher establishment costs, which rose from anaverage of 39% of the O&M budget in 1987/88 to 49% in 1995/96 (Table 5.2). Punjab has beendisinvesting public tubewells, which should reduce O&M demands considerably. Cost recovery inPunjab has deteriorated, with the gap between O&M expenditures (excluding flood control) andrecoveries increasing from 75% in 1992/93 to 80% in 1995/96.

5.17 Under the National Drainage Program (NDP), Pakistan is initiating ambitious institutionalreforms to address the chronic O&M problems in irrigation and drainage. These include: (1)establishment of autonomous (and eventually financially sustainable) Provincial Irrigation andDrainage Authorities (PIDAs) to manage intra-provincial irrigation and drainage infrastructureoutside canal commands; (2) creation of Area Water Boards (AWBs), initially on a pilot basis, tomanage such infrastructure within canal commands; (3) a direct link between O&M spending andrevenues by making PIDAs and AWBs responsible for collecting water charges; (4) progressivetransfer of responsibilities for O&M of small drains and minor canals to farmers' organizations

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(FOs); (5) streamlining and cost reductions in the operations of the PIDAs, AWBs, and FOs; and2(6) awarding of O&M contracts to the private sector. Government subsidies to FOs, AWBs, and

PIDAs will be progressively reduced, and the federal government's future role will be limited tomaintaining the inter-provincial drainage infrastructure.

Table 5.2: Indicators of O&M Spending and Cost Recovery in Punjab and Sindh*

(% of total O&M spending)

1987/88 1992/93 1995/96

Punjab: 100.0 100.0 100.0

oJw tubewells 46.2 33.4 42.1o/w establishment 39.0 54.0 49.0

Sindh**: 100.0 100.0 100.0

o/w tubewells 21.1 29.0 16.0o/w establishment 45.1 47.4 33.9

(% gap between total O&M spending and recoveries)

Punjab 71.2 73.9Sindh 79.3 97.2 87.8*Actual expenditures for 1992/93-1994/95; revised estimates for 1995196; budget estimatesfor 1996/97.

**Data for first year relate to 1991/92.

5.18 Roads. Responsibility for maintenance of the national road network rests with the federalNational Highway Authority (NHA), while in the provinces C&W Departments maintain intra-provincial highways and farm-to-market roads. These departments both contract work out to theprivate sector (mostly for periodic maintenance) and execute maintenance works themselves(mostly routine maintenance). The road sector suffers from a serious, worsening imbalancebetween new investment and maintenance. Recurrent expenditures accounted for only about 15%of total (federal and provincial) spending on roads in 1995/96, down from 21% in 1989/90. At thefederal level, maintenance has accounted for less than 6% of total expenditures on roads.

5.19 Federal budget allocations for maintenance have declined from 52% of networkrequirements in 1987 to only 34% in 1995. In NWFP, Balochistan, and Sindh, maintenanceexpenditures have been less than 50% of requirements. C&W officials in Punjab estimate thatthey receive only 75% of requirements (based on outdated 1992 yardsticks). These trends haveresulted in a further build-up of the road maintenance backlog (estimated at 20% of the totalnetwork length at the federal level and 30-50% in the provinces). The overall federal andprovincial shortfall in annual road maintenance funding (including minimum pavementstrengthening) is estimated at around Rs 2.5-3.0 billion. Finally, provincial C&W Departments

2 The initial experience with private sector O&M performance contracts under the Left Bank Outfall Drainage(LBOD) project has been very positive. A large number of bids were received, most of which were less than half thecost of comparable work by provincial irrigation departrnents.

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employ significant numbers of work-charged laborers ("gangmen"), who constitute an unnecessaryclaim on already inadequate maintenance budgets.

5.20 Beyond general fiscal resource constraints, shortfalls in non-wage O&M funding for roadsstem from four main factors: (1) lags in revising maintenance yardsticks to reflect changing costs;(2) underfunding of NHA's budget demands (now based on detailed field estimates of networkneeds); (3) persistent imbalances between capital expenditures and O&M; (4) payments tounderemployed work-charged staff; and (5) absence of any linkage between road user fees andmaintenance expenditures. Action on all of these fronts is required to enhance funding for roadmaintenance. The government should also implement institutional reforms aimed atcommercialization of roads, including introduction of a road user fee, establishment of a road fundfor the proceeds of such a fee, and creation of a public/private board to manage the fund.

Agenda for Reform

5.21 Medium-term solutions to O&M funding problems must be based on improvements in themanagement of public expenditures, in particular the development of a multi-year, sector-basedprogramming/budgeting approach (discussed in Chapter 3), under which sectoral objectives driveexpenditure programs and affordable infrastructure/service network sizes determine levels ofO&M spending. Some general options for arresting the deterioration in O&M funding andachieving improvements in the short run include the following:

* Revise O&M yardsticks for major sectors to ensure their accuracy, and regularly update themto take account of inflation. Such norms should include wage and non-wage components andshould avoid the rigidities associated with their use in the past. Budget allocations should bein accordance with these norms, with protection of the non-wage component.

* Review the size of existing public infrastructural and social service networks to assess theiraffordability in relation to O&M funding needs. Where too large, networks can be downsizedto free funds for adequate, sustainable O&M of the remaining network. Institutionalconsolidation (e.g. in agricultural research) frequently can accomplish the same objective.

* Encourage collection of appropriate user charges to (fully or partially) recover O&M costs;such proceeds should be used to fund O&M expenditures of the institutions concerned.

* Where possible, turn over responsibility for O&M management and funding to user groups,beneficiary communities, or the private sector, to strengthen accountability, introduce somedegree of market discipline, and promote greater cost recovery; maintenance standards couldthen be set in accordance with users' willingness to pay.

* Progressively relax existing rules and regulations to allow implementing agencies toreappropriate from their establishment costs for spending on O&M, while ensuring thatlegitimate personnel costs are adequately funded.

* Improve technical capabilities of line agencies and promote cost-effective practices, inparticular by contracting out maintenance activities rather than using force account procedures.

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6. STREAMLINING PUBLIC INVESTMENT

6.01 Pakistan's past development strategy emphasized public investment, embodied in thePublic Sector Development Program (PSDP). There are established procedures for planning andmanaging public investment, which distinguish between: (a) budgetary and non-budgetary publicinvestment, the latter consisting of investments by public sector corporations financed outside thebudget, and (b) the federal PSDP and provincial Annual Development Programs (ADPs). Inprinciple, the PSDP is supposed to be the annual slice of the Five Year Plan (FYP). In practice,however, it reflects the priorities of the FYP only partly, and there is little relation between thePSDP and the volume of investment required to meet FYP targets. Redefinition of the role ofgovernment, severe fiscal constraints, and chronic underfunding of O&M highlight the importanceof reforming and restructuring the PSDP and integrating public investment in the broader publicexpenditure management reforms discussed in Chapter 3. The international debate on publicinvestment and new approaches that have emerged are discussed in Box 6.1.

Box 6.1: Public Investment Programs - New PerspectivesPublic investment programs (PIPs) have been central to the planning process in many developing nations.

Often they have reflected an interventionist view of the role of the state that emphasized nation-building and directpublic sector involvement in economic activity. Changes in the role of government, doubts about the effectiveness ofpast public investments, and concerns about persistent weaknesses in public expenditure management have broughtinto question the role and usefulness of PIPs. Key issues of concern include the following:* Economic planners have excessively emphasized public investment to the neglect of policy alternatives which in

many cases can be expected to have greater and more inmmediate impact.* PIPs have contributed an expansionary thrust to public spending, which has led to unsustainable demands on

govemment funds, particularly for O&M expenditures.* The links between project selection, sectoral policies, and the appropriate roles of government have been weak.* The preoccupation of planners with public investment has led to insufficient attention being given to planning

recurrent expenditure programs, resulting in inadequate downstream O&M allocations.* In the face of chronic domestic funding constraints, many projects in PIPs have begun to include substantial

elements of recurrent spending. This has resulted in a loss of budgetary transparency.* In a number of countries, PIPs are now in effect foreign aid budgets, with most local resources used for

counterpart funding. While a PIP can provide a mechanism for coordinating foreign aid allocations, there is adanger of loss of integration between the PIP and domestically-funded recurrent expenditures.

In response to these concerns, there has arisen a new emphasis on sector expenditure programs. These startfrom a consideration of the sector policy and strategy framework and the role of public spending in the sector and thenseek to deternine an appropriate mix between recurrent and investment expenditures within a realistic assessment ofavailable resources. Sector expenditure programs may also include specific consideration and monitoring of theexpected outputs and outcomes of public expenditure.

There are also moves toward integrating recurrent and development budgets, although retaining a separatePIP in the short run may make sense, particularly where there is a large volume of foreign assistance. The key point isthat the PIP should become subordinated to the wider sector expenditure program, rather than vice versa.

Structure and Trends of Public Investment

6.02 In recent years, public investment in Pakistan has been nearly stagnant in real terms, and itsshare of total public expenditures and GDP has declined. Between 1990/91 and 1996/97 the totalPSDP fell as a share of GDP from 8.1% to 6.2% (see Table 6.1). The budgetary PSDP fell from6.9% of GDP in 1990/91 to 3.4% of GDP in 1996/97 and a budgeted 3.1% in 1997/98. The actualdecline in public investment may be even greater, since what is reported as development spending

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includes an increasing proportion of current expenditure.' These trends, mainly the result of fiscalresource constraints, have resulted in a growing backlog of infrastructure rehabilitation andmodernization, exacerbated by increasingly inadequate O&M allocations.

Table 6.1: National Budgetary Public Sector Development Program 1990/91-1997/98(Rs Million)

1990191 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Expenditures Expenditures Expenditures Expenditures Expenditures Expenditures Expenditures Allocations

A. BUDGETARYEconomic Services 3,832 4,692 5,804 4,069 4,812 3,742 3,179.0 2,503.8

Physical Infrastructure 33,220 29,755 41,001 44,504 50,443 51,020 47,901 59,809

Power 16,710 15,682 11,420 13,185 17,636 16,909 16,669.5 18,357.4

Social Services 9,663 9,353 11,300 8,222 12,197 13,196 12,376.9 18,725.8

Others 7,401 5,917 3,836 3,334 6,136 10,853 5,945.4 9,018.4

TOTALBUDGETARY 70,826 65,399 73,362 73,313 91,223 95,720 86,072 108,414

B. NON-BUDGETARYEconomic Services 2,239 3,216 2,323 2,176 1,062 4,522 1,189 1189

Physical Infrastructure 5,488 10,715 14,265 40,795 33,884 38,742 41,165 46,010

Power 4,001 12,069 25,214 27,752 27,545 33,831 19,506 20,858

TOTAL NON- 11,728 26,000 41,802 70,723 62,490 77,095 61,859 68,057BUDGETARY

TOTAL PSDP 82,554 91,400 115,164 144,036 153,713 172,815 147,931 176,472Memo Item:As a Percent of GDP:

Budgetary PSDP 6.9 5.4 5.5 4.7 4.8 4.4 3.6 3.9Total PSDP 8.1 7.5 8.6 9.2 8.2 8.0 6.2 6.4

Source: Planning Commission, and Ministry of Finance.

6.03 As is normal in any developing country, the development program in Pakistan is heavilyoriented toward physical infrastructure, with more than two-thirds of the budgetary PSDP going toirrigation, energy, transport and communications, physical planning and housing, and ruraldevelopment. The provincial ADPs exhibit a similar pattern. Since 1990/91 the share of resourcesallocated to economic services (agriculture, industry, and minerals) in the budgetary PSDP hasfallen significantly, while the share of social sectors has risen.

6.04 Currently a number of large infrastructure projects are being initiated outside the budgetand PSDP (see Box 6.2). While artificially keeping budgetary spending low in the short run, suchprojects would lead to a sharp increase in future and contingent fiscal liabilities of the publicsector. A few projects have been initially considered on Build, Operate, and Transfer (BOT) basisbut subsequently found their way into the budget. On the other hand, some projects that were

c As the share of the social sectors in the PSDP has increased, various development-oriented wage costs are beingincluded in the PSDP in increasing amounts. For example, the entire Population Welfare Program is part of the PSDP.Interest during construction (IDC) often claims a very large part of budgeted local counterpart funds, leaving only asmall amount to undertake actual development activities.

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proposed for PSDP funding but turned down later resurfaced as ostensibly private sector projects(but often with government guarantees or other public sector liabilities). Projects with contractoror supplier financing give only a temporary reprieve, as the future debt servicing burden has to beabsorbed by the budget. Many of the projects require government guarantees which createsignificant contingent fiscal liabilities (see Box 6.3). Many also have adverse balance of paymentsimplications. In view of these serious issues, the government needs to exercise great caution withrespect to moving ahead with any of these projects. In particular:

* All fiscal and BOP/debt implications of these projects need to be carefully assessed and fullyincorporated into the macro/budgetary framework.

* In addition to direct budgetary expenditure liabilities resulting from the need to servicesupplier's credit or other project-related borrowing, the contingent liabilities arising fromgovernment guarantees and recurrent cost liabilities need to be taken into account.

* It is also important to ensure that projects fit into the government's sectoral priorities as well ashaving acceptable economic and financial rates of return.

* There are also critical prerequisites related to effective regulation, autonomy with respect toprice setting, etc. for private infrastructure development to work well.

6.05 The share of the federal budgetary PSDP which is aid financed has increased from 39.5%in 1990/91 to 45.3% in 1997/98, with local counterpart funding for foreign-aided projectsaccounting for another 31% . Thus more than three-quarters of the federal budgetary PSDP nowconsists of activities funded at least in part by foreign assistance. There is a sharp dichotomybetween the characteristics of externally and domestically funded projects. The former tend to berelatively large (average size in 1996/97 was Rs 2.6 billion) and typically link investment inphysical facilities (often at a number of sites) with service and management reforms. By contrast,domestically-funded projects tend to be smaller (average size less than Rs 400 million) and oftensite-specific, and are almost exclusively concerned with physical asset creation.

6.06 Since 1992/93 the government, in consultation with the World Bank and other majordonors, has formulated a "Core Development Program" (CDP) on an annual basis, comprisinghigh-priority PSDP projects and programs, the allocations for which should be protected fromfiscal cutbacks during the course of the year. The CDP has become an effective tool to prioritizefunding decisions, especially in an adverse fiscal situation. In 1996/97 the CDP consisted of 47projects which together accounted for 52% of federal budgetary PSDP allocations.

6.07 Despite fiscal constraints, a large number of new projects have continued to be acceptedinto the PSDP/ADPs in recent years. This contributed to a large "throw-forward" of projectcommitments, which in 1996/97 amounted to 7.4 times the revised total PSDP allocation for theyear. In the face of worsening fiscal problems mainly related to poor revenue collection, thegovernment imposed a drastic Rs 20 billion (19%) cutback in the federal PSDP in October-November 1996. This reduction, although it inevitably had an adverse effect on developmentactivities, was on the whole well-prioritized, and efforts were made to protect the Core Program.In preparing the 1997/98 federal PSDP, the government took major actions to rationalize thepublic investment portfolio. Many relatively small projects were dropped from the PSDP, andonly a very small number of new projects were started. As a result, the throw-forward was

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substantially reduced from Rs 611 billion in 1996/97 to Rs 446 billion. Moreover, blockallocations like the People's Program (which had been a vehicle for politically-motivatedinterventions by members of the National and Provincial Assemblies) were eliminated. Fundingand implementation efforts have been concentrated on projects that are near completion and thosewhich can reap economic returns relatively quickly. Although in 1998/99 the budgetary PSDP wassharply increased by 25% and a number of new projects were added, the deterioration of themacroeconomic and external environment following Pakistan's nuclear tests and subsequentimposition of sanctions have necessitated a significant cutback.

Box 6.2: New Infrastructure ProjectsA number of large infrastructure projects are at various stages of preparation and discussion, and in one case

(the Islamabad-Peshawar Motorway) implementation has already started. These projects include:Islamabad-Peshawar Motorway: This Rs 24 billion project was inaugurated on December 19, 1997. It is

being financed by the contractor, but when payments come due over the next several years, they will be paid out of thefederal budget. In addition, the PSDP is covering the costs of land acquisition (an estimated Rs 800 million in1997/98, with an additional Rs 750 million budgeted in 1998/99).

New International Terminal at Lahore Airport: This was initially considered as a BOT project, but thecontractor was unable to reach financial closure and requested the government to provide guarantees for its loans.With an estimated cost of over Rs 10 billion, this project has been revived with contractor and commercial bankfinancing. The Civil Aviation Authority (CAA) is making a small contribution to the project, but CAA is alsoexpected to pay for electricity, gas, and water installation, taxes, and approach roads. Funding for such expenditureswould come from the PSDP or borrowing.

Pindi Bhattian-Faisalabad Motorway: This BOT project, to be implemented by a consortium of localcontractors, involves construction of a 52 km, six lane motorway linking Faisalabad to the existing Lahore-IslamabadMotorway. The project, which is expected to get underway shortly, has an estimated cost of Rs 7.3 billion and an 18-month construction period. The government will provide 30% equity in the project in the form of Rs 2 billion worth ofresidual Daewoo construction equipment (from the Lahore-Islamabad Motorway project) and a Rs 187 million cashcontribution, as well as land acquisition costs.

Karachi Mass Transit Project: BOT bids were invited for this light rail project, and the concession for thefirst two corridors was awarded to a Canadian group, originally with partial GOP financing envisaged. The project ispending financial closure due to inability of the government to raise the large funding required. However, anallocation for this project has been included in the 1998/99 PSDP.

Gawadar Seaport: The government plans to contract the construction of a seaport at Gawadar on BOTbasis. The total cost of this two-phased project is estimated at Rs 29 billion. Financing arrangements with partiesfrom South Korea, Iran, and Turkey reportedly are being explored.

Hyderabad-Karachi Motorway: This Rs 9 billion project is for expansion of the existing four-lanehighway between Karachi and Hyderabad into a six-lane motorway. BOT proposals are being sought.

Although the characteristics of individual projects differ, there are some common features:(1) Many of these projects are not included in the PSDP - some sponsoring agencies have autonomy to

approve projects in their sectors without going through the normal project approval procedures mandated by thePlanning Commission, provided that budgetary PSDP funds are not being requested. Hence these projects are notsubject to the normal discipline of the development program in terms of approval procedures and budgetary resourceconstraints; they also have fallen outside the purview of the World Bank's annual PSDP Review in the past.

(2) Although many of the projects have private sector characteristics at least to some degree, most of themalso carry substantial government liabilities, whether future debt servicing, foreign payment liabilities, governmentguarantees, operating subsidies, or in other forms.

(3) The priority in the sectoral context and in some cases the economic returns of projects are doubtful.(4) Frequent changes in the status and financing of these projects, as well as pressures from sponsors and

other project-related interests, give rise to concerns about transparency.

51

Planning and Management of Public Investment

6.08 The federal PSDP is managed by the Planning Commission, while the provincial Planningand Development (P&D) Departments manage the provinces' ADPs. Projects are selected into thePSDP/ADPs after having been designed and prepared in detail. The selection of projects tendednot to be resource-constrained, with strong incentives for sponsoring departments to try to gainapproval for an excessive number of new projects and thereby increase their share of availablepublic investment resources. The authority to approve a project depends on its size, with thesmallest projects being approved at departmental level and the largest being referred to theExecutive Committee of the National Economic Council (ECNEC). This has led to proliferationof small projects in the PSDP and to approval of projects without reference to availability offunding. The authority of certain sector agencies (National Highway Authority, Civil AviationAuthority, National Mass Transit Authority) to approve major projects without going through thediscipline of the Planning Commission's procedures can lead to overcommitment with respect tolarge new infrastructure projects as well (see Box 6.2). For aid-financed projects, "conceptclearance" from the Planning Conmmission is required before an agency can formally prepare aproject. The process of project selection has become increasingly politicized over the years.

Box 6.3: Government Guarantees to Private InfrastructurePrivate infrastructure investment in developing countries, much of it by foreign investors, has increased

enormously over the past decade. Private firms generally have stronger incentives to build and operate infrastructurefacilities efficiently, they can mobilize additional resources, and they generate stronger pressures for charging of cost-covering tariffs (which in turn permit expanded investment and services). However, these projects usually carrysubstantial risks, since gestation periods tend to be very long, investments are to a large extent sunk (i.e. they cannoteasily be shifted to other uses), and they often provide services that are considered "essential" on a monopoly basis.This combination makes private infrastructure investors vulnerable to opportunistic government actions - for example,the government may have an incentive to renege on its commitments once an investment is in place, although suchbehavior would be damaging to government credibility and would retard private investment over the longer run. Thelevel of demand also is an important risk factor given the immobility of most infrastructure.

To protect themselves, private investors often ask the government for extensive guarantees which, anxious toencourage private investment, developing-country governments often agree to provide. A certain minimum level ofrevenues may be guaranteed, e.g. for toll roads, airport runways, and independent power producers (IPPs). Wherepayments to the private entity go through a public utility, the government may guarantee payments by the utility, withsafeguards like a special account from which payments are automatically made. Payments may be made in foreignexchange to protect against losses due to devaluation. The government may provide guarantees against adverseregulatory changes. Besides explicit guarantees, the government may take on risks related to private infrastructureprojects through implicit guarantees to bail out domestic financial institutions (which may be lenders to privateinfrastructure projects) if they fail, or direct lending to or equity stakes in private infrastructure ventures.

Poorly designed guarantees, however, may undermine the benefits of projects, because they can blunt privateinvestors' incentives to choose good projects and run them efficiently, and they may impose excessive risks and costson a country's taxpayers or consumers. If a severe recession or economic crisis triggers a number of guaranteessimultaneously, serious fiscal and external imbalances may result. Similar problems can arise if there are substantialguarantees in a particular sector and sectoral policies or sectoral demand conditions go wrong.

These considerations point to the need for caution. Nevertheless, limited, well-structured government risk-bearing may be appropriate for a small number of projects of a "pilot" or "demonstration" nature, to attract initialprivate investment in sectors that are newly opened up and build up the government's credibility. Subsequently,extraordinary government guarantees should not be required if macroeconomic and sectoral policies are conducive toprivate investment and experience with the pilot project(s) has been good. Thus it is very important to maintain astable macroeconomic framework, establish an effective regulatory system, and develop approaches to privateinvestment which maximize the scope for competition (e.g. competitive bidding for licenses, breaking up public sectorpurchasers, allowing competition among private suppliers, etc.). Publicly disclosing relevant information andtransparency in the contracting process also are critical. Box 6.3 continues on next pageBox 6.3 continues

52

The risks associated with private infrastructure in principle can be allocated between firms, consumers, andthe government (ultimately taxpayers). Other things equal, specific risks should be borne by the agents that can bestinfluence the risky outcome. Second, risk should be borne by those who can bear risk at the lowest cost (because theyare the least risk-averse, they can most easily insure or hedge against risk, or they can spread risk among many agents).Sometimes these two principles conflict, and the transaction costs and infonnation requirements of risk allocation alsoneed to be taken into account. Nevertheless, the following implications can be drawn:

Construction risk (cost or time overruns) - since this type of risk is largely under private control, it should beborne by the private party.

Demand risk - the private party often can influence demand, e.g. through varying the quality of service or itsprice; in some cases, however, demand is completely inelastic or greatly influenced by the public sector, for examplewhen the latter is a monopsonistic purchaser, in which case the government may appropriately bear part (though notall) of the risk, e.g. through guaranteed minimum off-take or revenue (at well below full capacity utilization).

Exchange and interest rate risks - the rationale for government guarantees against these risks is somewhatshaky, for several reasons: (i) guarantees may encourage investors to finance a greater part of project costs throughlow-cost foreign borrowing; (ii) neither the responsibility for nor the consequences of exchange rate depreciation areentirely clear; and (iii) if large, such guarantees may discourage the government from depreciating the currency, evenif this is called for on macroeconomic grounds.

Political and regulatory risks - guarantees against traditional political risks such as expropriation, politicalviolence, changes in currency convertibility, and transferability of profits are well-justified (and are normal in the caseof foreign investment outside infrastructure sectors as well). Regulatory risks pose more difficult questions - thegovernment should not indemnify private parties against all risks of future changes in regulatory policy - butnevertheless there may be a case for use of guarantees as a transitional mechanism where regulation is not yet well-established and public sector decisionmaking (e.g. with respect to tariffs) is politicized.

In conclusion, in considering guarantees for private infrastructure the government should:* Measure and fully take into account the risks and associated contingent liabilities it is entering into and

incorporate them into the macroeconomic framework.* Strictly limit the size and number of guarantees entered into, both globally and in each sector, and only use

guarantees judiciously to promote limited "pioneer" investments.* Provide guarantees only against risks where the investor has no control over the outcome and in particular risks

associated with irresponsible government behavior.* Ensure that the process of project/investor selection is fully transparent, and that competition is built into the

process (through competitive bidding or other devices) and in the operations of private infrastructure facilities.* Establish effective regulation to minimize regulatory risks to private infrastructure facilities.* Exercise a great deal of caution where there are mixed vertical arrangements, such as IPPs supplying to an

inefficient public sector power utility whose tariffs remain under political control.

6.09 The annual PSDP planning cycle begins in October/November with the issuance of theBudget Call Circular and culminates with the submission of the budget to Parliament the followingJune. Preparation of the provincial ADPs follows a similar schedule. Both are budgetingexercises to allocate resources among approved projects, with little strategic dimension or linkageto sector policies and strategies. Initial budget submissions from line divisions/departments tendto far exceed available funds, undermining the usefulness of initial preparatory work. Finalfunding allocations are determined by bargaining between the Ministry of Finance (MOF),Planning Commission, and concerned ministry. Moreover, the bifurcation of budgetingresponsibilities between the Planning Commission and MOF has, during periods of fiscalstringency, led to delayed and inadequate releases of development funds by the latter, adverselyaffecting project implementation.

6.10 Procedures exist for transferring the recurrent costs of completed PSDP projects to currentexpenditure budgets, but these costs are chronically underestimated at time of project approval,and funding even of the estimated level of recurrent costs at time of project completion is highly

53

uncertain. Changing thinking about the linkage between public investment and recurrentexpenditures is discussed in Box 6.4.

Box 6.4: The Link Between Public Investment and Recurrent ExpenditureEnsuring adequate resources for the downstream recurrent expenditures arising from public investment

projects has been a problem in many developing countries. By the early 1980s, it was recognized that the recurrentexpenditure implications of development projects were being systematically underestimated and that this was leadingto unsustainable demands on recurrent budgets. This led to calculation of "r" coefficients, which attempted to showfor a sector or subsector the relationship between levels of public investment and growth of the recurrent budget. The"r" coefficients could be derived empirically or by time-series analysis of past trends, and they could be used todeterrnine an appropriate balance between recurrent and investment expenditures within a given resource framework.

There were conceptual problems associated with this approach, and in practice calculation of meaningful "r"coefficients proved difficult. Also, if recurrent budgets are significantly underfunded, empirical analysis of therelationship between recurrent and investment allocations is less meaningful. Moreover, the incremental approach tobudgeting implied by the use of "r" coefficients is inappropriate for a situation where there is a need for broad-basedexpenditure restructuring.

These problems have led to the emergence of a new paradigm, in which public investment is seen as aconsequence of decisions about the overall level of public spending in a sector rather than vice versa. For example,determining public investment requirements in primary education would be an iterative process involving linkingpolicy decisions about the desired type and level of education with the level of education services that can be affordedwith available financial resources and the investment requirements necessary to sustain that level of education services.Similarly, in the road sector investment requirements can be seen as arising out of decisions about the size of the roadnetwork that can be sustained within available recurrent funding resources.

6.11 A number of factors adversely affect project implementation performance. These include:(i) weaknesses in project design and preparation, particularly limited beneficiary participation andlack of government "ownership" in the preparation of many donor-supported projects; (ii) delaysin project start-up due to problems in concluding financing agreements, slow appointment ofproject directors, and delays in meeting project effectiveness conditions; (iii) problems withproject staffing and management including high turnover of project directors, shortages ofaccounting and procurement skills, inadequate delegation of authority, and weak governanceincluding political interventions in project management; (iv) insufficient budget allocations forprojects and shortfalls and delays in releases of funds; (v) irregularities and delays in procurementand contracting; (vi) lack of attention to the wider policy framework on which the outcome of aproject may depend; and (vii) inadequate project supervision arrangements.

6.12 Although considerable information is available for monitoring PSDP implementation, itsusefulness is weakened by duplication and inconsistencies in data from different sources, lack of asectoral focus, and fragmentation of information by projects; by budgetary and staffing limitationsparticularly affecting the Projects Wing of the Planning Commission; and by inadequate projectmonitoring capacity in the line divisions/departments (see Box 6.5). Project monitoringprocedures which seem to have worked reasonably well in the 1960s and 1970s have deterioratedand even fallen into disuse subsequently. A provision for independent evaluation of larger projectsis normally included in project budgets, but this tends to get squeezed out at the time of annualbudget preparation.

54

Box 6.5: Sources of Project Monitoring Information in Pakistan

Source/Type of Information CommentsA. Financial Monitoring InformationThe Budget Wing of the MOF Based on checks issued, but not necessarilyMonthly expenditure returns from executing agencies on projects. comprehensive as some projects may delay

retums.The Accountant General Pakistan Revenues (AGPR) Broken down by functional division, but not byMonthly statements of development expenditures by functional heads. individual project. Based on payments made.

Excludes non-budgetary investment.The Economic Affairs Division Often considerably delayed. May be the only sourcePeriodic statements of project aid disbursements from donor agencies. of information on payments made directly by a

donor on behalf of a project.B. Physical and Financial Monitoring InformationProgramming Section of the Planning Commission Broken down by sector and project. FinancialTechnical divisions receive quarterly physical and financial progress information does not necessarily tally with retumsreports from each project (Form PC-III). These are consolidated by the provided to MOF/AGPR. Submissions may beProgramming Section. delayed.The Projects Wine of the Planning CommIiission Staff constraints and lack of financial resources haveMonitors projects costing over Rs 100 million based on separate and considerably limited the scope and detail ofmore detailed quarterly progress reports introduced in 1997. Undertakes monitoring. Little incentive for project managersreviews/evaluations of around 50 projects per year. to provide timely infonnation.Project Manager's Progress Report Circulation often limited.Separate progress reports required quarterly or half-yearly for somedonor-funded projects. These follow formats prescribed by donors.

Proposals for Reform

6.13 In addition to the more general reforms in public expenditure management recommendedin Chapter 3, six strategic measures have been identified to improve the quality and effectivenessof the PSDP in the face of continuing funding constraints:

6.14 Reducing funding demands on the PSDP. In view of Pakistan's tight fiscal situation andthe continuing need for budgetary restraint, it is essential to further redefine the role of governmentso that resources can be concentrated in priority areas where there is no alternative to publicinvestment. Considerable progress has been made in this regard, but demands on the PSDP can befurther reduced by moving ahead with the ongoing privatization program, expanding private sectorinvestment in infrastructure, and promoting private/public sector partnerships where appropriate.

6.15 Further rationalizing the portfolio of development projects. The government madeconsiderable progress in this regard in preparing the 1997/98 PSDP, which was partially reversedin the 1998/99 PSDP. Further efforts and continuing vigilance are required to minimize theunnecessary throw-forward and ensure that it does not creep up again in the future. Keyrationalization measures include: (i) removal of projects which have received zero or tokenfunding allocations for some time; (ii) grouping of similar projects into broader sub-sectoralprograms; (iii) an annual review of ongoing projects in each sector to ascertain whether someprojects are in need of restructuring, downsizing, or termination; and (iv) withdrawal of theauthority of the District Development Working Party (DDWP) and lower-level bodies to approveprojects and enhancing the powers of the Provincial Development Working Parties (PDWPs) andCentral Development Working Party (CDWP) in this regard, with only the largest projectsrequiring ratification by ECNEC.

55

6.16 Introduction of a program framework for public investment. This is required to ensure thatpublic investment decisions fully reflect government policies, strategies, and expenditurepriorities. It could involve: (i) strengthening the policy basis and outcome orientation through a"PSDP Framework" for each sector that explicitly links policy objectives with public expenditureand investment requirements and outcome indicators; (ii) possibly establishment of medium-termPSDP resource ceilings for each sector as an interim step toward a full medium-term expenditureframework covering both recurrent and investment allocations (see Chapter 3); (iii) a two-stepproject approval procedure with initial screening of investment proposals for inclusion in thePSDP prior to detailed preparation and appraisal (see Box 6.6); and (iv) ensuring bettercoordination and balance between the federal PSDP and provincial ADPs.

Box 6.6: Project ScreeningIn a number of countries, the introduction of an initial project screening prior to detailed project preparation

has been found to facilitate improved management of public investment, for several reasons:* Screening enables a project to be checked for compliance with government policies and expenditure priorities,

and where necessary rejected, before resources are committed to detailed preparation.* For many projects, particularly in the social sectors, internal rates of return cannot be calculated, and investment

decisions are largely policy determined. In such cases, project preparation primarily involves determining themost appropriate design for the project rather than the decision to invest per se, which can be based on screening.

* By establishing a rough estimate of project costs, it can be determined whether and when the project can be fit intoaggregate and sectoral public investment resource ceilings. This encourages line agencies to prioritize theirproject requests against available resources, improving the quality of their investment portfolios.

* Initial screening enables project design and recurrent financing issues to be reviewed and alternatives consideredbefore detailed preparation commences.

* It facilitates medium-term planning and phasing of public investment and sets the "agenda" for project design andpreparation by getting line agencies to develop a "pipeline" of projects commencing in future years.

* Projects, once screened, may then be included in the public investment program, on the understanding that theirfunding is dependent on the submission and approval of a detailed project proposal.

6.17 Improving project implementation performance. While rationalizing the PSDP projectportfolio, strengthening the policy foundation of public investment, and other related reforms willhave a positive impact on project implementation, a number of additional measures can be taken inthis regard: (i) strengthening project management and staffing; (ii) ensuring timely flow ofbudgeted funds to projects: (iii) eliminating inappropriate procedures and regulations whichundermine the responsibility of project directors, contribute to implementation delays, and lead tohigher costs; and (iv) promoting stronger local accountability.

6.18 Strengthening monitoring and evaluation. Specific actions include: (i) improvements inthe structure and presentation of expenditure statements prepared by the AGPR so that they can beused for effective financial monitoring of the budgetary PSDP; (ii) strengthening projectmonitoring capacities in line divisions/departments; (iii) strengthening the monitoring activities ofthe Planning Commission through capacity building and institutional readjustments as needed;(iv) agreeing as part of the annual PSDP/ADP budget cycle on a program of project evaluations tobe carried out each year; (v) ensuring that the results of program and project evaluations are fedback into the planning process; and (vi) improving the flow of expenditure information from lineagencies to Planning and Finance divisions/departments at federal and provincial levels.

6.19 Institutional and planning cycle reforms. Significant changes will be required in the roleand functions of the Planning Commission/PDDs as well as in the annual PSDP/ADP planning

56

cycle. These will involve an enhanced role for line agencies in sector policy and programdevelopment; greater focus on economic and financial analysis in the work of the PlanningCommission/PDDs, with technical aspects devolved to the line divisions/departments; and greateremphasis by the Planning Commission on medium-term forecasting, review and determination ofsector/program resource allocations, and monitoring and evaluation.

Short-Term Actions

6.20 While comprehensive reforms along the lines proposed above will take time, much can bedone in the short run to improve the programming, management, and effectiveness of publicinvestment, consistent with the overall direction of reform. Possible short-term measures include:

* Incorporating all large infrastructure projects with public sector liabilities (current, future, orcontingent) into the macroeconomic framework and planning process;

* abolishing token budget allocations and suspending or closing down projects which cannot befinanced meaningfully (as indicated, for example, by their receiving zero or minimalallocations for several years);

3 carefully scrutinizing all new projects and including in the PSDP only those of highest priority,with due consideration to fiscal resource availability;

- grouping small facility-specific projects within larger sub-sectoral investment programs;

- re-introducing a three-year time horizon for programming of development expenditures at bothfederal and provincial levels;

- as suggested in Chapter 3, integrating the budgeting of development and recurrentexpenditures, initially within the existing line agencies;

- introducing competitive recruitment and renewable term contracts for project directors;

* devising and implementing an action plan to reduce delays in releases of project funds; and

* assigning higher priority and allocating more resources to monitoring and evaluation of thedevelopment program.

SELECTED BIBLIOGRAPHY

Auditor-General of Pakistan. Combined Finance and Revenue Accounts for theFederal and Provincial Governments of Pakistan for the Year 1994-95.

Auditor-General of Pakistan. Audit Report: Federal Government --(Civil) 1993-94.Vol. I, November 6, 1995.

Campos and Pradhan. The Impact of the Budgetary Institutions on ExpenditureOutcomes: Binding Governments to Fiscal Performance. July 29, 1996.

Gazette. Notification of Amendment of Rules of Business (Schedule 1).November 19, 1996.

Government of Balochistan. Appropriation Accounts. Various issues.Government of Balochistan. Budget Documents. Various issues.Government of Balochistan. Finance Accounts of Government of Balochistan.

Various issues.Government of NWFP. Appropriation Accounts. Various issues.Government of NWFP. Budget Documents. Various issues.Government of NWFP. Finance Accounts of Government of NWFP. Various issues.Government of Pakistan. The Constitution of the Islamic Republic of Pakistan.

March 19, 1985.Government of Pakistan. Recommendations of the Task Force on Public Expenditure Review.

December 1, 1996.Government of Pakistan, Cabinet Secretariat. Rules of Business 1973. July 30, 1996.Government of Pakistan, Finance Division. Revision of Management Scales etc. for

Senior Executives.Government of Pakistan, Finance Division. Pension Rules: Revision of Pension Rules and

Rates -- Recommendations of the Pay and Services Commission.Government of Pakistan, Finance Division. Revised System of Financial Control and

Budgeting. 1981.Government of Pakistan, Finance Division. Revision of Basic Pay Scales and Fringe Benefits of

Civil Employees (B1-22) of the Federal Government (1994). July 15, 1994.Government of Pakistan, Finance Division. Budget Documents. 1995/96-1996/97.Government of Pakistan, Finance Division. Average Monthly Cost of Federal

Government Employeesfrom BPS-i to BPS-22. 1997.Government of Pakistan, Housing and Works Division. Revision of Rental Ceiling for Hiring

Residential Accommodation at Islamabad etc. July 25, 1996.Government of Pakistan, National Finance Commission Secretariat. Report of the National

Finance Commission 1996. April, 1997.Government of Pakistan, Planning and Development Division. Public Sector Development

Program. Various issues.Government of Pakistan, Planning Commission. Approach to the Ninth Plan 1998-2003.

July, 1996.Government of Pakistan, Planning and Development Division. Pakistan 2010 Programme - A

Vision for Knowledge-led, Just, Tolerant, Enterprising & Prosperous Society. 1998.Government of Pakistan, Works Division. Revision of Hiring Rates for Office Accommodation at

Islamabad, Rawalpindi, etc. September 24, 1991.

Government of Punjab. Appropriation Accounts. Various issues.Government of Punjab. Budget Documents. Various issues.Government of Punjab. Finance Accounts of Government of Punjab. Various issues.Government of Punjab, Services & General Administration Department. Punjab

ESTACODE. Vol. I. 1996.Government of Sindh. Appropriation Accounts. Various issues.Government of Sindh. Budget Documents. Various issues.Government of Sindh, Consolidated Recruitment Rules of various Departments of

Government of Sindh.Government of Sindh. Finance Accounts of Government Sindh. Various issues.Government of Sindh. Karachi Special Development Project: Metropolitan Management and

Budgeting Study, Executive Summary. March, 1991.Government of Sindh. Metropolitan Resource Generation Study, Final Report,

Vol. IA - Executive Summary. May, 1993.Government of Sindh. The Sindh Civil Servants (Appointments, Promotion and Transfer)

Rules,1974. 1995.Government of Sindh. The Sindh Government Rules of Business. March, 1996.Pakistan Agriculture Research Council. ESTACODE: Civil Establishment Code: A

Compendium of Laws, Rules and Regulations Relating to Terms and Conditions ofFederal Civil Servants.

Pakistan Agriculture Research Council. A Handbook for Drawing and Disbursing Officers. 1988.Pakistan Agriculture Research Council. Census over the Years 1973-1989.

February 1994.Pasha, Hafiz A. Political Economy of Tax Reforms: Pakistan's Experience.Pradhan, Sanjay. Evaluating Public Spending: A Frameworkfor Public Expenditure Reviews.

World Bank Discussion Paper No. 323.Premchand, A. Issues and New Directions in Public Expenditure Management. International

Monetary Fund. Working Paper. November 1996.Social Policy Development Center, Karachi. Ninth Five Year Plan (1998-2003):

Issues Paper. April 8, 1996.World Bank. Pakistan: Telecommunications Regulation and Privatization Support Project.

October 18, 1995.World Bank. Pakistan: Improvement to Financial Reporting and Auditing Project.

August 5, 1996.World Bank. Public Expenditure Management Handbook. Public Sector Management Unit,

Poverty and Social Policy Department. 1997.World Bank. Pakistan Economic Update: Adjustment and Reforms for a Better Future.

April 22, 1998.

PAKISTAN:

PUBLIC EXPENDITURE REVIEW

REFORM ISSUES AND OPTIONS

STATISTICAL APPENDIX

The World BankSouth Asia Region

List of Tables

Page No.

Table 1: National: Total (Current & Development) Expenditures 1Table 2: National: Current Expenditures 2Table 3: National: Development Expenditures 3Table 4: Federal: Total (Current & Development) Expenditures 4Table 5: Federal: Current Expenditures 5Table 6: Federal: Development Expenditures 6Table 7: All Provinces Total (Current & Development) Expenditures 7Table 8: All Provinces: Current Expenditures 8Table 9: All Provinces: Development Expenditures 9Table 10: Punjab: Total (Current & Development) Expenditures 10Table 11: Punjab: Current Expenditures 11Table 12: Punjab: Development Expenditures 12Table 13: Sindh: Total (Current & Development) Expenditures 13Table 14: Sindh: Current Expenditures 14Table 15: Sindh: Development Expenditures 15Table 16: NWFP: Total (Current & Development) Expenditures 16Table 17: NWFP: Current Expenditures 17Table 18: NWFP: Development Expenditures 18Table 19: Balochistan: Total (Current & Development) Expenditures 19Table 20: Balochistan: Current Expenditures 20Table 21: Balochistan: Development Expenditures 21Table 22: Sanctioned Posts by Government 22

Table 1: National: Total (Current & Development) Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 264,818 303,227 340,886 377,251 451,133 518,556 644,266 707,025General Administration 15,175 19,406 22,176 24,781 35,464 49,265 42,778 41,425Law & order 9,949 12,995 13,729 15,616 19,785 20,749 21,707 22,681

Defense 62,596 75,907 87,461 93,973 113,281 119,303 127,441 134,020Social services 32,134 37,965 41.365 45,922 56,928 62,924 81,562 85,646

Education 20,974 25,112 27,266 31,580 38,196 42,194 56,478 61,397Primary 8,853 11,009 11,864 13,772 16,580 18,774 27,431 31,797

Secondary 4,860 5,585 6,179 7,434 9,203 10,976 12,937 13,561

University & College Edu 3,093 3,107 3,756 4,078 4,463 5,179 4,709 5,011Professional & Technical Edu & Teachers Trng 1,781 2,062 2,503 2,348 2,436 2,437 2,558 2,036

Others 2,388 3,350 2,965 3,948 5,512 4,829 8,843 8,992Health 6,019 7,299 7,780 9,326 12,081 13,384 17,928 18,004

General Hospitals & Clinics 4,834 5,885 6,200 7,447 8,563 7,744 9,786 10,722

Mother & Child 34 36 35 41 48 68 79 75Other Facilities & Preventive Measures 280 467 518 493 1,666 2.136 897 631

Other 871 911 1,027 1.345 1,804 3,435 7,166 6,576Population 415 472 717 983 1,483 2,005 1,291 1,435Other Social Services 4,744 5,109 5,640 4,089 5,220 5,341 5,864 4,811

Economic Services 25,791 29,665 26,857 24,389 31,557 36,012 46,198 44,054

Agriculture 4,603 6,596 6,464 6,995 7,791 8,294 9,939 9,653

Irrigation 7,046 8,282 7,545 6,647 9,706 11,844 18,477 15,119Industries and mineral resources 899 981 1,009 1,130 1,376 1,339 2,465 2,683

Other Economic Services 13,243 13,805 11,839 9,616 12,684 14,536 15.318 16,600Community services 17,860 19,334 23,199 23,828 32,861 34,029 35,094 36,704

Works (Administration civil) 1,406 1,885 2,137 2,590 3,255 3,376 4,216 5,029

Highways,Roads&Bridges&Building&Struct. 11,682 11,161 11,153 10,400 15,252 14,252 18,617 18,810

Water Supply and Sanitation 1,320 1,777 2,378 2,578 2,664 3,141 3,253 3,203

Public Health Engineering 1,166 1,266 1,414 1,327 1,940 2,859 3,162 3,712Broadcasting 337 433 400 422 547 568 721 578

Urban Town Planning & Regulator Services 503 616 943 1,180 1,788 2,519 811 592

Scientific Research and Survey 1,255 1,861 2,475 4,350 6,272 6,566 1,726 1,991

Other Community Services 197 337 2,301 985 1,142 748 2,587 2,788Subsidies 11,287 10,114 8,079 5,905 5,735 10,568 12,928 13,271Interest payments 62,577 81,532 97,192 119,624 122,080 158,400 227.858 278,714

Grants 23,656 11,903 17,064 13,601 28,312 19,630 13,702 20,798Unallocable 3,793 4,410 3,764 9,619 5,088 7,681 32,248 28,060

Source: Federal and Provincial Tables.

1

Table 2: National: Current Expenditures(Rs. million

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 222,426 260,958 298,919 335,779 389,057 455,320 549,233 627,675General Administration 13,352 17,740 20,324 22,185 33,759 47,355 41,995 40,969Law & order 9,834 12,907 13,671 15,587 19,747 20,710 21,707 22,681Defense 62,596 75,907 87,461 93,973 113,281 119,303 127,441 134,020Social services 27,682 33,237 37,236 40,395 49,225 53,977 65,642 73,249

Education 18,903 22,923 25,614 29,108 35,677 39,610 49,326 55,777Primary 8,547 10,907 11,658 13,586 16,342 18,290 23,374 28,024Secondary 4,705 5,383 6,090 7,372 9,026 10,816 12,020 13,105University & College Edu 2,629 2,843 3,587 3,864 4,163 4,914 3,979 4,155Professional & Technical Edu & Teachers Trng 1,574 1,788 2,137 2,185 2,157 2,247 1,689 1,759Others 1,448 2,002 2,143 2,100 3,989 3,343 8,264 8,734

Health 5,173 6,208 6,830 7,694 9,171 10,184 12,200 13,498General Hospitals & Clinics 4,381 5,211 5,773 6,493 7,664 7,127 8,481 9,677Mother & Child 27 28 33 35 48 68 79 75Other Facilities & Preventive Measures 204 250 273 253 345 382 447 472Other 560 718 752 913 1,114 2,608 3,193 3,274

Population 3 2 3 5 11 7 30 35Other Social Services 3,603 4,104 4,788 3,589 4,366 4,175 4,085 3,939

Economic Services 13,653 13,171 13,726 13,617 16,716 19,627 19,109 20,139Agriculture 3,492 4,140 4,494 5,036 5,752 6,304 6,599 7,402Irrigation 3,298 3,717 4,074 3,875 4,978 6,046 7,087 7,054Industries and mineral resources 772 857 903 949 1,177 1,251 1,171 1,517Other Economic Services 6,091 4,457 4,255 3,756 4,809 6,025 4,252 4,166

Community services 5,457 6,560 8,418 8,575 10,587 11,001 12,415 15,155Works (Administration civil) 1,404 1,880 2,132 2,586 3,023 3,373 4,216 5,029Highways, Roads & Bridges & Building & Struct. 2,141 2,498 3,402 3,057 3,717 3,439 3,432 4,567Water Supply and Sanitation 355 491 658 754 752 853 1,108 1,545Public Health Engineering 136 147 277 312 428 483 721 833Broadcasting 337 433 400 422 547 568 573 578Urban Town Planning & Regulator Services 215 196 380 300 375 333 447 450Scientific Research and Survey 816 844 1,012 1,023 1,573 1,515 1,488 1,741Other Community Services 52 70 157 120 172 437 429 413

Subsidies 10,014 8,883 7,269 5,267 5,730 10,468 12,928 13,271Interest payments 62,577 81,532 97,192 119,309 122,080 158,400 227,858 278,709Grants 13,477 6,619 9,866 7,258 12,854 6,804 13,702 20,798Unallocable 3,785 4,405 3,758 9,616 5,078 7,676 6,436 8,683

Source: Federal and Provincial Tables.

2

Table 3: National: Development Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994195 1995/96 1996197 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 42,392 42,270 41,967 41,472 62,076 63,237 95,033 79,350General Administration 1,823 1,666 1,852 2,597 1,705 1,909 783 456Law & order 114 88 58 29 38 39 0 0Defense 0 0 0 0 0 0 0 0Social services 4,452 4,729 4,130 5,526 7,703 8,947 15,920 12.397

Education 2,071 2,189 1,652 2,472 2,519 2,585 7,152 5,620Primary 305 102 206 186 238 484 4,057 3,774Secondary 155 201 89 62 178 160 918 456University & College Edu 464 263 170 214 300 265 730 856Professional & Technical Edu & Teachers Trng 207 274 366 163 279 190 869 276Others 940 1,348 822 1,848 1,523 1,486 579 258

Health 846 1,091 950 1,632 2,910 3,200 5,728 4,506General Hospitals & Clinics 454 674 428 954 899 617 1,306 1.045Mother & Child 6 8 2 6 0 0 0 0Other Facilities & Preventive Measures 76 216 245 240 1,321 1,755 450 159Other 311 193 275 432 690 827 3,973 3,302

Population 412 470 714 978 1,472 1,997 1,261 1,400Other Social Services 1,141 1,005 852 501 854 1,166 1,779 872

Economic Services 12,138 16,494 13,131 10,772 14,841 16,386 27,089 23,915Agriculture 1,112 2,456 1,970 1,959 2,038 1,990 3,340 2,251Irrigation 3,748 4,564 3.471 2,771 4,728 5,798 11,390 8,065Industries and mineral resources 127 125 106 181 199 88 1,294 1,166Other Economic Services 7,152 9,349 7,584 5,861 7,875 8,510 11,065 12,433

Community services 12,403 12,774 14,781 15,253 22,274 23,028 22,678 21,549Works (Administration civil) 3 5 5 5 231 3 0 0Highways, Roads & Bridges & Building & Struct. 9,541 8,663 7,751 7,343 11,535 10,813 15,185 14.242Water Supply and Sanitation 964 1,286 1,721 1,824 1,912 2,288 2,144 1,658Public Health Engineering 1,030 1.119 1,137 1,015 1,512 2,376 2,441 2,879Broadcasting 0 0 0 0 0 0 148 0Urban Town Planning & Regulator Services 287 419 563 879 1,413 2,186 364 142Scientific Research and Survey 439 1,017 1,463 3,327 4,699 5,051 238 250Other Community Services 145 267 2,144 865 971 311 2,158 2,376

Subsidies 1,273 1,231 810 637 5 100 0 0Interest payments 0 0 0 315 0 0 0 5Grants 10,180 5,285 7,198 6,343 15,458 12,826 0 0Unallocable 8 4 5 3 10 5 25,812 19,378

Source: Federal and Provincial Tables.

3

Table 4: Federal: Total (Current & Development) Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993194 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 179,909 201,881 231,771 262,698 304,503 350,587 460,865 516,070General Administration 9,248 11,762 12,727 15,269 18,381 20,131 21,517 20,690Law & order 3,548 4,629 4,682 5,191 7,102 7,236 7,647 8,089Defense 62,596 75,907 87,461 93,973 113,281 119,303 127,441 134,020Social services 8,108 8,527 9,182 9,459 12,196 13,717 14,736 13,625

Education 3,733 3,677 3,994 4,286 5,081 5,506 6,203 5,645Primary 531 396 402 477 635 546 438 53Secondary 473 570 550 615 741 899 76 29University & College Edu 1,388 1,404 1,589 1,631 1,810 1,846 323 457Professional & Technical Edu & Teachers Trng 524 632 714 728 865 804 520 47Others 816 674 738 836 1,031 1,412 4,846 5,059

Health 1,017 1,224 1,245 1,640 2,849 3,435 4,572 4,031General Hospitals & Clinics 697 865 846 1,258 1,375 1,293 - -Mother & Child 1 1 1 1 1 1Other Facilities & Preventive Measures 57 190 224 203 1,258 1,741Other 262 168 174 177 215 400 4,572 4,031

Population 353 396 604 774 943 1,129 1,064 1,194Other Social Services 1/ 3,005 3,230 3,339 2,759 3,323 3,646 2,897 2,755

Economic Services 10,622 10,755 10,055 9,755 11,351 13,465 21,683 20,990Agriculture 403 1,483 1,168 1,365 1,076 1,269 1,637 946irrigation 1,190 1,472 865 889 1,410 1,821 7,695 5,920Industries and mineral resources 413 457 462 512 715 725 1,635 1,831Other Economic Services 2/ 8,616 7,343 7,560 6,989 8,150 9,650 10,716 12,293

Community services 4,649 4,701 6,947 8,367 11,799 12,551 16,769 17,506Works (Administration civil) 735 947 1,123 1,460 1,621 1,856 2,453 2,792Highways, Roads & Bridges & Building & Struct. 1,828 786 740 903 1,422 868 11,343 11,525Water Supply and Sanitation - - - - - - - -Public Health Engineering 29 36 29 31 94 96 102 104Broadcasting 337 433 400 422 547 568 721 578Urban Town Planning & Regulator Services 459 599 930 1,156 1,758 2,490 427 446Scientific Research and Survey 1,255 1,861 2,475 4,350 6,272 6,566 1,668 1,944Other Community Services 3/ 11 39 1,250 45 85 108 55 117

Subsidies 9,447 8,620 6,712 4,775 3,736 7,766 7,588 7,394Interest payments 46,893 62,851 75,534 94,028 96,409 130,997 198,523 247,861Grants 21,123 9,752 14,783 12,312 25,284 18,171 12,899 19,741Unallocable 3,675 4,378 3,687 9,568 4,964 7,251 32,061 26,154

1/Includes Natural Calamities and Religious Affairs.2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services.3/Includes Works Urban and Rural, and Scientific Research.Source: Government of Pakistan, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

4

Table 5: Federal: Current Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 159,796 185,611 212,968 241,878 272,696 316,791 398,209 461,907General Administration 7.614 10,194 11,019 12,798 16,811 18,397 21,144 20,525Law & order 3,533 4,620 4,680 5,190 7,102 7,236 7,647 8,089Defense 62,596 75,907 87,461 93,973 113,281 119,303 127,441 134,020Social services 5,694 6,838 7,627 7,584 8.840 9,128 8.913 9,300

Education 2,388 2,984 3,532 3,689 4,202 4,508 4,700 5,059Primary 286 369 395 421 582 457 - -Secondary 403 500 525 583 698 811University & College Edu 942 1,155 1,432 1,436 1,534 1,616Professional & Technical Edu & Teachers Trng 415 506 655 694 696 729Others 342 454 524 555 692 895 4,700 5,059

Health 737 872 993 1,279 1,415 1,583 1,665 1,849General Hospitals & Clinics 567 679 764 1,040 1,113 1,264 - -

Mother & Child 1 1 1 I 1 1Other Facilities & Preventive Measures 51 54 71 67 96 84Other 118 138 157 171 205 234 1,665 1.849

Population 3 2 3 4 10 7 29 33Other Social Services 1/ 2,566 2,980 3,099 2,612 3,213 3,030 2,520 2,359

Economic Services 5,983 4,305 4,284 3,744 4,287 5,237 2,573 2,725Agriculture 362 405 533 647 593 663 756 766Irrigation 20 13 42 41 64 69 73 77Industries and mineral resources 389 446 457 505 681 717 576 858Other Economic Services 2/ 5.212 3,441 3,252 2,551 2,949 3,788 1,168 1.024

Community services 2,438 2,850 3,529 3,786 4,913 4,950 5,095 5,717Works (Administration civil) 735 947 1,123 1,456 1,621 1,856 2,453 2,792Highways, Roads & Bridges & Building & Struct. 296 391 498 524 658 509 - -

Water Supply and Sanitation 0 0 0 0 0 0 -

Public Health Engineering 29 36 29 31 94 82 102 104Broadcasting 337 433 400 422 547 568 573 578Urban Town Planning & Regulator Services 214 192 374 285 345 316 427 446Scientific Research and Survey 816 844 1,012 1,023 1,573 1,515 1,485 1,737Other Community Services 3/ 11 8 92 45 75 104 55 59

Subsidies 8,194 7,429 5,911 4,184 3,736 7,720 7,588 7,394Interest payments 46,893 62,851 75,534 94,028 96,409 130,997 198,523 247,861Grants 13,176 6,239 9,236 7,023 12,353 6,573 12,899 19,741Unallocable 3,675 4,378 3,687 9,568 4.964 7,251 6.385 6.536

1/ Includes Natural Calamities and Religious Affairs.2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services.

3/Includes Works Urban and Rural, and Scientific Research.

Source: Government of Pakistan, Finance Accounts - 1984/85 to 1995/96 & Budget Documentsfor 1996/97-1997/98.

5

Table 6: Federal: Development Expenditures(Rs. million)

1990f91 1991192 1992/93 1993/94 1994/95 1995/96 1996197 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 20,113 16,270 18,803 20,820 31,807 33,796 62,656 54,163General Administration 1,634 1,568 1,708 2,471 1,570 1,734 373 165Law & order 15 8 2 1 0 0 0 0Defense 0 0 0 0 0 0 0 0Social services 2,414 1,689 1,555 1,875 3,356 4,588 5,823 4,325

Education 1,345 693 462 597 879 998 1,503 586Primary 245 27 7 56 53 89 438 53Secondary 70 71 25 32 43 88 76 29University & College Edu 446 249 157 195 275 229 323 457Professional & Technical Edu & Teachers Tmg 109 125 59 34 169 75 520 47Others 474 220 214 281 339 517 146 0

Health 280 352 252 361 1,434 1,852 2,907 2,182General Hospitals & Clinics 130 186 81 218 262 30 - -Mother & Child 0 0 0 0 0 0 - -

OtherFacilities & Preventive Measures 6 135 153 136 1,162 1,656Other 144 30 17 7 10 166 2,907 2,182

Population 350 394 601 770 933 1,123 1,035 1,161Other Social Services 439 250 240 147 110 616 377 396

Economic Services 4,639 6,450 5,771 6,011 7,064 8,228 19,110 18,265Agriculture 41 1,078 635 718 483 605 881 179Irrigation 1,170 1,459 823 848 1,346 1,752 7,622 5,844Industries and mineral resources 24 11 5 7 34 8 1,059 973Other Economic Services 3,404 3,902 4,308 4,438 5,201 5,862 9,548 11,269

Community services 2,211 1,851 3,418 4,581 6,886 7,602 11,674 11,790Works (Administration civil) 0 0 0 4 0 0 0 0Highways, Roads & Bridges & Building & Struct. 1,532 395 242 379 765 359 11,343 11,525Water Supply and Sanitation 0 0 0 0 0 0 0 0Public Health Engineering 0 0 0 0 0 14 0 0Broadcasting 0 0 0 0 0 0 148 0Urban Town Planning & Regulator Services 245 407 556 871 1,413 2,173 0 0Scientific Research and Survey 439 1,017 1,463 3,327 4,699 5,051 183 207Other Community Services 0 31 1,158 1 9 4 0 58

Subsidies 1,253 1,191 801 591 0 47 0 0Interest payments 0 0 0 0 0 0 0 0Grants 7,947 3,512 5,547 5,289 12,931 11,598 0 0Unallocable 0 0 0 0 0 0 25,676 19,618

Source: Federal total (Table 4) and Federal current (Table 5) tables.

6

Table 7: All Provinces Total (Current & Development) Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 84,909 101,346 109,115 114,554 146,630 167,969 183,401 190,955General Administration 5,927 7,644 9,449 9,513 17,083 29,134 21,261 20,735Law & order 6,401 8,366 9,047 10,425 12,683 13,512 14,060 14,592Defense 0 0 0 0 0 0 0 0Social services 24,026 29,438 32,183 36,462 44,732 49,207 66,827 72.021

Education 17,241 21,435 23,272 27,294 33,115 36,688 50,275 55,752Primary 8,321 10,613 11,462 13,295 15,946 18,229 26,993 31,744Secondary 4,387 5,015 5,628 6,820 8,462 10,077 12,861 13,531University & College Edu 1,704 1,702 2,167 2,447 2,654 3,334 4,387 4,554Professional & Technical Edu & Teachers Tmg 1,257 1,431 1,789 1,620 1,572 1,633 2,038 1,989Others 1,572 2,675 2,226 3,112 4,481 3,417 3,996 3.933

Health 5,002 6,075 6,535 7,686 9,232 9,949 13,356 13.973General Hospitals & Clinics 4,137 5,020 5,355 6,189 7,188 6,451 9,786 10,722Mother & Child 33 35 34 40 46 67 79 75Other Facilities & Preventive Measures 223 277 294 290 408 396 897 631Other 608 743 853 1,168 1,590 3,035 2,594 2,545

Population 62 76 113 209 540 875 228 241Other Social Services 1,739 1,879 2,301 1,330 1,897 1,695 2.967 2,056

Economic Services 15,169 18,910 16,802 14,633 20,206 22,547 24,515 23,064Agriculture 4,200 5,113 5,296 5,630 6,715 7,026 8,302 8,707Irrigation 5,856 6,810 6,680 5,758 8,296 10,023 10,782 9,199Industries and mineral resources 486 524 547 618 661 613 830 852Other Economic Services 4,627 6,462 4,279 2,627 4,534 4,886 4,602 4.306

Community services 13,211 14,633 16,252 15,461 21,062 21,478 18,325 19,198Works (Administration civil) 671 938 1,014 1,131 1,634 1,520 1,763 2,237Highways, Roads & Bridges & Building & Struct. 9,855 10,375 10,413 9,497 13,830 13,384 7,274 7,285Water Supply and Sanitation 1,320 1,777 2,378 2,578 2,664 3,141 3,253 3,203Public Health Engineering 1,137 1,230 1,385 1,296 1,846 2,763 3,060 3,608Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 44 17 13 24 30 29 384 146Scientific Research and Survey 0 0 0 0 0 0 59 47Other Community Services 186 298 1,050 940 1,058 641 2,532 2,671

Subsidies 1,840 1,494 1,367 1,130 1,999 2,801 5,340 5,877Interest payments 15,684 18,681 21,658 25,596 25,671 27,403 29,335 30,853Grants 2,533 2,152 2,281 1,289 3,028 1,459 803 1,057Unallocable 118 32 76 51 124 430 187 1.907

Source: Provincial tables.

7

Table 8: All Provinces Current Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 62,630 75,347 85,951 93,901 116,361 138,528 151,024 165,768General Administration 5,738 7,546 9,305 9,387 16,948 28,958 20,852 20,444Law & order 6,301 8,287 8,991 10,397 12,645 13,473 14,060 14,592Defense 0 0 0 0 0 0 0 0Social services 21,988 26,399 29,609 32,811 40,385 44,848 56,729 63,949

Education 16,515 19,939 22,082 25,419 31,475 35,102 44,626 50,718Primary 8,261 10,537 11,263 13,165 15,760 17,833 23,374 28,024Secondary 4,302 4,884 5,564 6,789 8,328 10,005 12,020 13,105University & College Edu 1,687 1,688 2,154 2,428 2,629 3,298 3,979 4,155Professional & Technical Edu & Teachers Trng 1,159 1,282 1,482 1,492 1,461 1,518 1,689 1,759Others 1,106 1,548 1,618 1,545 3,297 2,448 3,564 3,675

Health 4,436 5,336 5,837 6,415 7,756 8,601 10,535 11,649General Hospitals & Clinics 3,814 4,533 5,009 5,453 6,551 5,863 8,481 9,677Mother & Child 27 27 32 34 46 67 79 75Other Facilities & Preventive Measures 154 196 202 185 249 297 447 472Other 442 580 595 742 909 2,374 1,528 1,425

Population 0 0 0 1 1 1 2 2Other Social Services 1,037 1,124 1,689 977 1,153 1,145 1,566 1,580

Economic Services 7,670 8,866 9,442 9,873 12,429 14,390 16,535 17,415Agriculture 3,130 3,735 3,961 4,389 5,159 5,641 5,843 6,636Irrigation 3,278 3,704 4,032 3,834 4,914 5,977 7,013 6,977Industries and mineral resources 383 411 446 444 496 534 595 659Other Economic Services 879 1,016 1,003 1,205 1,860 2,238 3,084 3,142

Community services 3,019 3,710 4,889 4,789 5,674 6,052 7,320 9,439Works (Administration civil) 669 933 1,009 1,130 1,403 1,517 1,763 2,237Highways, Roads & Bridges & Building & Struct. 1,846 2,108 2,904 2,533 3,060 2,930 3,432 4,567Water Supply and Sanitation 355 491 658 754 752 853 1,108 1,545Public Health Engineering 107 111 248 281 333 401 619 729Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 1 4 6 15 30 17 20 4Scientific Research and Survey 0 0 0 0 0 0 3 4Other Community Services 41 63 64 75 96 334 374 353

Subsidies 1,820 1,454 1,358 1,083 1,994 2,748 5,340 5,877Interest payments 15,684 18,681 21,658 25,281 25,671 27,403 29,335 30,848Grants 301 379 630 235 501 231 803 1,057Unallocable 110 28 71 48 114 425 51 2,147

Source: Provincial tables.

8

Table 9: All Provinces Development Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 22,279 26,000 23,164 20,652 30,269 29,440 32,377 25,187General Administration 189 98 144 126 135 176 410 291Law & order 99 79 56 28 38 39 0 0Defense 0 0 0 0 0 0 0 0Social services 2,038 3,040 2,575 3,651 4,347 4,359 10,098 8.072

Education 726 1,496 1,190 1,875 1,640 1,586 5,649 5,034Primary 60 75 199 130 185 395 3.619 3,721Secondary 85 131 64 30 134 72 842 427University & College Edu 18 14 13 19 25 35 407 399Professional & Technical Edu & Teachers Tmg 98 149 306 128 110 115 349 229Others 466 1,127 608 1,567 1,185 969 433 258

Health 566 739 698 1,271 1,476 1,348 2,821 2,324General Hospitals & Clinics 324 488 346 736 637 588 1,306 1,045Mother & Child 6 8 2 6 0 0 0 0Other Facilities & Preventive Measures 70 81 92 104 158 99 450 159Other 167 163 258 425 680 661 1,066 1,119

Population 62 76 113 208 539 874 226 239Other Social Services 702 755 612 353 744 550 1,401 476

Economic Services 7,499 10,044 7.360 4,760 7,777 8,158 7,980 5,650Agriculture 1,071 1,378 1,335 1,241 1,556 1,384 2,459 2,072Irrigation 2,578 3,105 2,648 1,923 3,382 4,046 3,768 2,221Industries and mineral resources 103 114 101 174 165 79 235 193Other Economic Services 3,748 5,446 3,276 1,422 2,674 2,648 1,518 1,164

Community services 10,192 10,923 11,363 10,671 15,388 15,426 11,004 9,759Works (Administration civil) 3 5 5 1 231 3 0 0Highways, Roads & Bridges & Building & Struct. 8,009 8.268 7,509 6,964 10,770 10,454 3,842 2,717Water Supply and Sanitation 964 1,286 1,721 1,824 1,912 2,288 2,144 1,658Public Health Engineering 1,030 1,119 1,137 1,015 1,512 2,362 2,441 2,879Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 42 12 6 9 0 13 364 142Scientific Research and Survey 0 0 0 0 0 0 55 43Other Community Services 145 236 986 864 961 307 2,158 2,318

Subsidies 20 40 9 46 5 53 0 0Interest payments 0 0 0 315 0 0 0 5Grants 2,233 1,772 1,652 1,054 2,527 1,229 0 0Unallocable 8 4 5 3 10 5 136 (240)

Source: Provincial total (Table 7) and Provincial current (Table 8) tables.

9

Table 10: Punjab: Total (Current & Development) Expenditers(Rs. million)

1990191 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 43,643 48,444 52,593 52,211 68,087 80,095 91,252 95,666General Administration 2,947 3,735 4,667 4,724 8,142 14,667 12,426 10,830Law & order 3,342 3,709 4,225 4,646 5,491 5,965 6,540 6,831Defense 0 0 0 0 0 0 0 0Social services 12,935 14,753 16,172 18,183 22,539 24,913 35,445 38,986

Education 9,579 11,049 12,093 13,963 17,049 19,144 27,154 30,673Primary 4,789 5,932 6,146 7,283 9,140 10,433 16,280 20,013Secondary 2,460 2,682 2,917 3,494 4,207 4,807 5,970 5,692University & College Edu 947 763 1,225 1,322 1,462 1,748 2,331 2,316Professional & Technical Edu & Teachers Tmg 825 848 1,138 1,016 792 875 843 909Others 558 823 667 847 1,446 1,281 1,730 1,743

Health 2,538 2,884 3,157 3,608 4,391 4,636 6,309 7,287General Hospitals & Clinics 2,187 2,451 2,709 3,048 3,661 3,952 4,878 5,703Mother & Child 17 14 16 17 20 38 49 41Other Facilities & Preventive Measures 11 11 11 13 17 32 47 39Other 324 409 420 530 692 615 1,334 1,505

Population 0 0 0 75 391 492 0 0Other Social Services 1/ 817 820 923 536 708 641 1,982 1,026

Economic Services 8,701 10,035 8,519 6,010 9,123 10,579 11,452 12,462Agriculture 2,218 2,399 2,766 2,600 3,276 3,409 4,783 5,173Irrigation 3,163 3,326 3,108 2,520 3,541 4,849 5,879 5,679Industries and mineral resources 197 192 194 195 238 226 366 423Other Economic Services 2/ 3,123 4,117 2,451 695 2,068 2,096 424 1,187

Community services 5,832 5,717 6,988 6,390 9,319 9,677 8,512 10,884Works (Administration civil) 54 63 69 80 109 103 111 127Highways, Roads & Bridges & Building & Struct. 4,499 4,185 5,054 4,747 6,968 6,246 3,638 4,687Water Supply and Sanitation 0 0 0 0 0 0 0 0Public Health Engineering 1,107 1,192 1,348 1,255 1,800 2,715 3,013 3,554Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0Scientific Research and Survey 0 0 0 0 0 0 3 4Other Community Services 171 277 517 309 442 612 1,747 2,512

Subsidies 582 908 541 46 505 1,153 1,577 2,083Interest payments 7,955 9,130 10,520 11,945 12,467 12,951 13,303 13,428Grants 1,274 449 931 236 499 184 107 53Unallocable 76 7 30 31 1 5 (859) (1,541)

1/Includes Natural Calamities and Religious Affairs.2/Includes Land Reclamation, Rural Development, Transport & Communication, Other Economic Services & Unallocable.3/Includes Works Urban and Rural, and Scientific Research.Source: Government of the Punjab, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

10

Table 11: Punjab: Current Expenditures(Rs. million)

1990191 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 32,834 37,093 42,659 45,769 56,418 68,290 75,502 80,666General Administration 2,839 3,700 4,625 4,708 8,122 14,626 12,230 10,673Law & order 3,342 3,709 4,225 4,646 5,491 5,965 6,540 6,831Defense 0 0 0 0 0 0 0 0Social services 12,425 13,674 15,361 17,305 21,222 23,373 30,410 34,241

Education 9,422 10,511 11,611 13,683 16,750 18,661 24,429 27,637Primary 4.789 5,909 6,013 7,234 9,013 10,157 14,355 17,618Secondary 2,408 2.588 2,901 3,474 4,194 4,806 5,707 5,475University & College Edu 938 761 1,214 1,315 1,452 1.741 2,127 2,096Professional & Technical Edu & Teachers Tmg 771 761 894 929 750 835 738 790Others 516 493 590 732 1,341 1,123 1,501 1,657

Health 2,298 2,506 2,931 3,078 3,892 4,123 5,049 5,767General Hospitals & Clinics 1,959 2,086 2,494 2,525 3,230 3,469 4,178 4,908Mother & Child 17 14 16 17 20 38 49 41Other Facilities & Preventive Measures 11 11 11 13 12 27 47 39Other 312 395 410 523 630 589 774 780

Population 0 0 0 0 0 0 0 0Other Social Services 1/ 705 657 819 544 580 589 933 837

Economic Services 4,160 4,461 4,951 4,890 5,872 7,323 7,979 8,986Agriculture 1,732 1,848 2,103 2,270 2,718 2,927 3,046 3,551Irrigation 1,966 2,067 2,323 2,127 2,603 3,796 4,279 4,580Industries and mineral resources 190 181 192 195 237 224 255 274Other Economic Services 2/ 271 366 333 298 313 377 399 580

Community services 1,262 1,413 2,167 2,109 2,584 2,806 3,356 4,371Works (Administration civil) 54 63 69 80 109 103 111 127Highways, Roads & Bridges & Building & Struct. 1,104 1,232 1,841 1,729 2,128 2,044 2,323 3,241Water Supply and Sanitation 0 0 0 0 0 0 0 0Public Health Engineering 77 74 212 243 288 353 572 675Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0Scientific Research and Survey 0 0 0 0 0 0 3 4Other Community Services 3/ 27 43 45 57 59 305 347 324

Subsidies 562 868 532 0 500 1,100 1,577 2,083Interest payments 7,955 9,130 10,520 11,945 12,467 12,951 13,303 13,428Grants 220 134 248 137 160 145 107 53Unallocable 69 4 30 29 0 0 0 0

I/lIncludes Natural Calamities and Religious Affairs.2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services.3/Includes Works Urban and Rural, and Scientific Research.Source: Government of the Punjab, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

11

Table 12: Punjab: Development Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 10,809 11,351 9,934 6,442 11,669 11,805 15,750 15,000General Administration 108 35 42 16 20 41 196 157Law & order 0 0 0 0 0 0 0 0Defense 0 0 0 0 0 0 0 0Social services 509 1,079 811 878 1,317 1,541 5,034 4,745

Education 157 538 482 281 298 483 2,725 3,036Primary 0 23 133 50 128 276 1,925 2,395Secondary 52 95 17 20 13 1 263 218University & College Edu 9 2 11 8 10 7 204 219Professional & Technical Edu & Teachers Trng 54 88 243 88 42 40 105 118Others 42 331 77 115 105 159 228 86

Health 240 378 225 531 499 514 1,260 1,520General Hospitals & Clinics 228 365 215 523 431 482 700 795Mother & Child 0 0 0 0 0 0 0 0Other Facilities & Preventive Measures 0 0 0 0 5 5 0 0Other 11 14 10 7 62 26 560 725

Population 0 0 0 75 391 492 0 0Other Social Services 112 163 104 0 129 52 1,049 189

Economic Services 4,541 5,574 3,568 1,120 3,251 3,256 3,473 3,476Agriculture 486 552 663 330 558 482 1,737 1,621Irrigation 1,197 1,260 785 393 938 1,053 1,600 1,099Industries and mineral resources 7 12 2 0 1 2 111 149Other Economic Services 2,852 3,751 2,118 397 1,755 1,719 25 607

Community services 4,570 4,304 4,821 4,281 6,735 6,871 5,156 6,513Works (Administration civil) 0 0 0 0 0 0 0 0Highways, Roads & Bridges & Building & Struct. 3,395 2,953 3,213 3,018 4,840 4,202 1,315 1,446Water Supply and Sanitation 0 0 0 0 0 0 0 0Public Health Engineering 1,030 1,118 1,136 1,011 1,512 2,362 2,441 2,879Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0Scientific Research and Survey 0 0 0 0 0 0 0 0Other Community Services 144 233 472 252 383 307 1,400 2,188

Subsidies 20 40 9 46 5 53 0 0Interest payments 0 0 0 0 0 0 0 0Grants 1,053 316 683 98 339 39 0 0Unallocable 8 3 0 2 1 5 -859 -1,542

Source: Punjab total (Table 10) and Punjab current (Table 11) tables.

12

Table 13: Sindh: Total (Current & Development) Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 19,844 25,038 26,585 30,395 40,265 45,198 44,798 45,051General Administration 1,465 2,036 2,345 2,339 5,865 10,160 4,291 4,386Law & order 1,657 2,676 2,563 3,510 4,378 4,635 4,771 4,669Defense 0 0 0 0 0 0 0 0Social services 5,137 6,989 7,621 8,212 10,596 11,548 15,141 15,652

Education 3,787 5,128 5,490 6,264 8,246 8,794 11,346 12,265Primary 1,857 2,453 2,758 3,353 3,984 4,408 5,704 6,049Secondary 1,017 1,154 1,373 1,615 1,859 2,430 3,027 3,715University & College Edu 416 511 596 636 610 917 1,146 1,197Professional & Technical Edu & Teachers Tmg 245 355 296 317 437 452 596 553Others 252 655 467 342 1,356 587 874 750

Health 1,158 1,590 1,449 1,719 2,010 2,242 3,349 2,943General Hospitals & Clinics 952 1,338 1,213 1,477 1,591 1,819 2,106 2,248Mother & Child 6 8 2 6 0 0 0 0Other Facilities & Preventive Measures 135 178 175 162 267 235 644 429Other 65 67 58 74 152 188 600 266

Population 0 0 0 0 0 199 0 0Other Social Services 1/ 192 271 683 229 341 313 446 444

Economic Services 2,847 3,408 3,244 3,740 5,009 4,893 7,436 4,852Agriculture 725 1,098 888 963 1.081 1,273 1,187 1,135Irrigation 1,428 1,621 1,602 1,697 2,831 2,986 3,037 1.769Industries and mineral resources 140 140 118 175 243 153 204 154Other Economic Services 2/ 554 549 636 904 854 481 3,007 1,794

Community services 3,709 4,314 3,949 3,952 5,314 5,267 3,289 2,932Works (Administration civil) 200 264 288 322 391 469 457 510Highways, Roads & Bridges & Building & Struct. 2,961 3,418 2,893 2,752 3,868 3,736 1,664 1,297Water Supply and Sanitation 471 572 714 815 950 981 1,092 1,051Public Health Engineering 28 35 36 38 46 48 47 54

Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 44 15 11 20 30 26 18 4Scientific Research and Survey 0 0 0 0 0 0 6 10Other Community Services 3/ 7 10 7 5 29 7 6 6

Subsidies 583 112 326 463 304 248 1,383 1,208Interest payments 3,600 4,512 5,364 7,172 6,366 7,009 7,677 8,412Grants 805 968 1,131 989 2,311 1,018 65 199Unallocable 41 24 42 19 123 425 745 2,742

I/ Includes Natural Calamities and Religious Affairs.2/ A substantial amount on the suspense account is included under this head.3/Includes land reclamation, stationery & printing and rural development etcSource: Government of the Sindh, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

13

Table 14: Sindh: Current Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 14,688 19,387 21,296 24,914 31,592 37,485 37,298 41,051General Administration 1,456 2,025 2,335 2,329 5,842 10,142 4,233 4,352Law & order 1,627 2,650 2,557 3,510 4,378 4,633 4,771 4,669Defense 0 0 0 0 0 0 0 0Social services 4,875 6,731 7,403 7,882 10,174 11,060 13,088 14,601

Education 3,680 5,016 5,402 6,181 8,106 8,689 10,091 11,579Primary 1,802 2,406 2,709 3,312 3,936 4,392 4,986 5,687Secondary 1,007 1,141 1,360 1,609 1,841 2,407 2,865 3,634University & College Edu 412 498 596 633 603 906 1,029 1,089Professional & Technical Edu & Teachers Tmg 223 325 282 302 385 417 427 477Others 236 647 456 326 1,342 568 784 691

Health 1,030 1,458 1,337 1,487 1,745 2,067 2,629 2,603General Hospitals & Clinics 888 1,260 1,152 1,324 1,491 1,714 1,866 2,152Mother & Child 0 0 0 0 0 0 0 0Other Facilities & Preventive Measures 103 133 130 107 172 197 268 283Other 39 65 55 56 82 156 495 168

Population 0 0 0 0 0 0 0 0Other Social Services 1/ 166 257 664 214 324 304 367 419

Economic Services 1,815 2,388 2,213 2,615 3,202 2,909 4,587 3,649Agriculture 525 843 643 801 899 1,066 947 975Irrigation 728 922 935 938 1,448 1,255 1,800 1,237Industries and mineral resources 90 101 98 102 89 125 154 149Other Economic Services 2/ 472 521 537 774 766 463 1,685 1,289

Community services 617 787 757 871 955 1,012 1,445 1,819Works (Administration civil) 200 264 288 322 391 469 457 510lighways, Roads & Bridges & Building & Struct. 313 387 300 297 358 276 578 664Water Supply and Sanitation 68 89 121 196 113 199 340 581Public Health Engineering 28 35 36 38 46 48 47 54Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 1 3 5 14 30 13 18 4Scientific Research and Survey 0 0 0 0 0 0 0 0Other Community Services 3/ 7 9 6 5 18 7 6 6

Subsidies 583 112 326 463 304 248 1,383 1,208Interest payments 3,600 4,512 5,364 7,172 6,366 7,009 7,677 8,407Grants 75 159 300 54 257 47 65 199Unallocable 41 24 42 19 114 424 50 2,147

I/Includes Natural Calamities and Religious Affairs.2/Includes Land Reclamation, Rural Development, Fuel and Power, Transport and Communication, & Unallocable.3/Includes Works Urban and Rural, and Scientific Research.Source: Government of the Sindh, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

14

Table 15: Sindh: Development Expenditures(Rs. million )

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 5,156 5,651 5,289 5,481 8,674 7,713 7,500 4,000General Administration 9 11 10 10 23 18 58 34Law & order 30 26 6 0 0 2 0 0Defense 0 0 0 0 0 0 0 0Social services 261 258 218 330 422 487 2,053 1,051

Education 107 111 87 83 140 105 1,255 686Primary 55 47 49 41 48 16 718 362Secondary 10 14 12 6 19 23 162 81University&CollegeEdu 4 12 0 4 7 11 117 108Professional & Technical Edu & Teachers Tmg 23 31 14 15 53 35 169 76Others 15 8 12 16 14 19 90 59

Health 128 133 113 232 265 175 720 340General Hospitals & Clinics 64 78 61 153 100 105 241 96Mother & Child 6 8 2 6 0 0 0 0Other Facilities & Preventive Measures 32 45 45 55 96 38 375 146Other 26 2 4 18 70 32 104 98

Population 0 0 0 0 0 199 0 0Other Social Services 26 15 19 15 17 9 78 25

Economic Services 1,032 1,020 1,031 1,125 1,807 1,983 2,849 1,202Agriculture 200 255 245 162 182 207 241 160Irrigation 700 699 667 759 1,383 1,731 1,237 532Industries and mineral resources 50 38 20 74 154 28 50 5Other Economic Services 83 27 98 130 88 18 1,322 505

Community services 3,093 3,527 3,192 3,080 4,359 4.255 1,844 1,113Works (Administration civil) 0 0 0 0 0 0 0 0Highways, Roads & Bridges & Building & Struct. 2,648 3,030 2,593 2,455 3,510 3.460 1,086 632Water Supply and Sanitation 403 483 593 618 837 782 752 470Public Health Engineering 0 0 0 0 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 42 12 6 7 0 13 0 0Scientific Research and Survey 0 0 0 0 0 0 6 10Other Community Services 0 1 0 0 12 0 0 1

Subsidies 0 0 0 0 0 0 0 0Interest payments 0 0 0 0 0 0 0 5Grants 730 808 831 935 2,054 971 0 0Unallocable 0 0 1 0 9 0 695 595

Source: Sindh total (Table 13) and Sindh current (Table 14) tables.

15

Table 16: NWFP: Total (Current & Development) Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 13,932 17,683 18,735 19,350 23,824 26,937 31,926 33,439General Administration 904 1,137 1,398 1,428 1,959 2,720 2,781 3,446Law & order 820 1,179 1,248 1,310 1,634 1,705 1,617 1,831Defense 0 0 0 0 0 0 0 0Social services 4,124 4,982 5,707 5,958 7,024 7,903 11,900 12,306

Education 2,712 3,421 3,982 4,334 5,044 5,738 8,857 9,374Primary 1,210 1,556 1,723 1,738 2,078 2,456 3,801 4,341Secondary 715 907 1,013 1,370 1,736 2,043 2,815 2.823University & College Edu 191 235 250 274 326 405 678 634Professional & Technical Edu & Teachers Trng 152 190 226 227 266 224 512 389Others 445 533 770 725 638 611 1,052 1,187

Health 812 996 1,206 1,328 1,601 1,730 2,532 2,368General Hospitals & Clinics 667 820 959 1,077 1,319 0 2,082 1,840Mother & Child 4 5 5 6 7 9 9 9Other Facilities & Preventive Measures 45 43 55 59 67 65 139 79Other 96 127 187 186 208 1,656 302 440

Population 43 49 75 78 96 112 228 241Other Social Services 1/ 556 516 443 218 282 323 283 323

Economic Services 1,981 3,130 2,635 2,727 3,388 4,425 3,559 3,652Agriculture 699 911 893 975 1,024 1,144 1,231 1,125Irrigation 753 899 871 900 1,006 1,170 1,118 1,163Industries and mineral resources 85 102 125 126 82 139 189 183Other Economic Services 444 1,218 746 727 1,276 1,972 1,020 1,181

Community services 2,234 2,674 3,070 2,754 3,862 3,780 4,291 2,932Works (Administration civil) 173 229 246 271 322 350 378 432Highways, Roads & Bridges & Building & Struct. 1,631 1,856 1,942 1,805 2,763 2,305 1,467 904Water Supply and Sanitation 428 586 883 677 776 1,125 1,414 1,361Public Health Engineering 2 2 0 0 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 0 0 0 364 142Scientific Research and Survey 0 0 0 0 0 0 37 21Other Community Services 0 1 0 0 0 0 630 71

Subsidies 510 250 400 550 940 850 1,200 2,000Interest payments 2,903 3,597 4,057 4,559 4,799 5,297 5,946 6,467Grants 455 735 219 64 218 257 631 805Unallocable 0 0 0 0 0 0 0 0

1/ Includes Natural Calamities and Religious Affairs.Source: Govemment of North-West Frontier Province, Finance Accounts - 1984/85 to 1995/96 & Budget Documentsfor 1996/97-1997/98.

16

Table 17: NWFP: Current Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 10,023 12,344 13,880 14,929 18,755 21,634 25,800 30,059General Administration 846 1,108 1,306 1,328 1.868 2,609 2,639 3,373Law & order 812 1,179 1,247 1,310 1,633 1,699 1,617 1,831Defense 0 0 0 0 0 0 0 0Social services 3,299 4,148 4,680 5,186 6,222 7,197 9,755 10,766

Education 2,500 3,157 3,569 3,932 4,750 5,499 7,657 8,460Primary 1,205 1,551 1,706 1,699 2,068 2,352 3,101 3,536Secondary 692 884 978 1,366 1,634 1,996 2,478 2,748University & College Edu 186 235 248 266 318 388 611 620Professional & Technical Edu & Teachers Trng 131 160 177 202 251 184 445 383Others 286 328 459 399 479 580 1,022 1.174

Health 721 881 1,008 1,163 1,372 1,590 1,972 2,158General Hospitals & Clinics 636 775 889 1,018 1,212 0 1,717 1,686Mother & Child 4 5 5 6 7 9 9 9Other Facilities & Preventive Measures 7 8 8 10 9 10 65 66Other 74 94 105 129 143 1,571 181 397

Population 0 0 0 1 1 1 2 2Other Social Services 1/ 79 109 103 90 99 107 124 146

Economic Services 1,080 1,260 1,373 1,401 2,205 2,947 2,636 3,188Agriculture 468 569 621 683 771 838 921 1,009Irrigation 461 552 597 586 658 709 702 851Industries and mineral resources 50 62 83 70 76 89 122 168Other Economic Services 2/ 101 77 72 62 701 1,312 890 1,160

Community services 566 716 736 867 1,004 996 1,375 1,629Works (Administration civil) 170 225 241 271 321 347 378 432Highways, Roads & Bridges & Building & Struct. 228 262 238 314 343 330 532 662Water Supply and Sanitation 166 227 257 281 339 319 464 534Public Health Engineering 2 2 0 0 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0Scientific Research and Survey 0 0 0 0 0 0 0 0Other Community Services 0 0 0 0 0 1 0 0

Subsidies 510 250 400 550 940 850 1,200 2,000Interest payments 2,903 3,597 4,057 4,245 4,799 5,297 5,946 6,467Grants 6 86 82 44 84 39 631 805Unallocable 0 0 0 0 0 0 0 0

Ilncludes Natural Calamities and Religious Affairs.2/Includes Rural Development, Transport & Communication, Other Economic Services & Unallocable.Source: Government of North-West Frontier Province, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

17

Table 18: NWFP: Development Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 3,909 5,339 4,855 4,421 5,070 5,303 6,126 3,380General Administration 58 29 93 100 92 110 142 72Law & order 8 0 1 0 1 6 0 0Defense 0 0 0 0 0 0 0 0Social services 825 834 1,027 772 802 706 2,145 1,540

Education 212 264 413 402 295 239 1,200 914Primary 5 5 17 39 10 103 700 805Secondary 23 23 35 4 103 47 337 76University & College Edu 5 0 2 8 8 17 67 14Professional & Technical Edu & Teachers Trng 21 31 49 25 16 40 67 6Others 159 205 311 326 159 31 30 13

Health 92 114 198 165 228 140 560 210General Hospitals & Clinics 32 45 70 59 107 0 365 154Mother & Child 0 0 0 0 0 0 0 0Other Facilities & Preventive Measures 38 36 47 49 57 55 74 13Other 22 33 82 57 65 85 120 43

Population 43 49 75 77 95 112 226 239Other Social Services 477 407 340 128 183 216 159 177

Economic Services 901 1,870 1,262 1,326 1,183 1,478 923 464Agriculture 231 341 271 292 253 307 310 116Irrigation 292 347 275 313 349 461 416 312Industries and mineral resources 35 40 42 56 7 50 67 15Other Economic Services 343 1,141 674 665 575 660 130 22

Community services 1,668 1,958 2,334 1,887 2,858 2,784 2,916 1,304Works (Administration civil) 3 5 5 1 1 3 0 0Highways, Roads & Bridges & Building & Struct. 1,404 1,594 1,704 1,490 2,420 1,975 935 242Water Supply and Sanitation 262 359 626 396 437 807 950 827Public Health Engineering 0 0 0 0 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 0 0 0 364 142Scientific Research and Survey 0 0 0 0 0 0 37 21Other Community Services 0 1 0 0 0 0 630 71

Subsidies 0 0 0 0 0 0 0 0Interest payments 0 0 0 315 0 0 0 0Grants 449 648 137 21 134 218 0 0Unallocable 0 0 0 0 0 0 0 0

Source: NVFP total (Table 16) and NWFP current (Table 17) tables.

18

Table 19: Balochistan: Total (Current & Development) Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1/ 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

TOTAL EXPENDITURES 7,490 10,181 11,202 12,598 14,453 15,739 15,426 16,799General Administration 2/ 611 736 1,039 1,021 1,116 1,588 1,764 2,074Law & order 582 802 1,011 960 1,180 1,207 1.132 1.261Defense 0 0 0 0 0 0 0 0Social services 1,831 2,714 2,683 4,110 4,573 4,843 4,341 5,077

Education 1,163 1,838 1,708 2,733 2,776 3,013 2.918 3,440Primary 466 672 836 921 743 933 1,207 1,341Secondary 195 271 325 341 659 797 1,050 1,300University & College Edu 151 194 97 214 256 263 232 407Professional & Technical Edu & Teachers Tmg 34 37 129 59 76 82 88 138Others 318 664 322 1,198 1,041 937 341 254

Health 494 605 723 1,031 1,231 1,340 1,166 1,375General Hospitals & Clinics 331 412 473 586 617 680 720 931Mother & Child 6 8 10 10 19 20 21 25Other Facilities & Preventive Measures 33 45 53 56 56 64 67 85Other 124 141 188 377 538 576 358 335

Population 18 26 38 57 52 72 0 0Other Social Services 174 271 252 346 566 419 256 262

Economic Services 1,640 2,337 2,404 2,156 2,686 2,650 2,068 2,099Agriculture 558 705 749 1,092 1,334 1,199 1,100 1,275Irrigation 513 963 1,099 641 918 1,018 748 588Industries and mineral resources 64 91 109 122 98 95 71 92Other Economic Services 506 578 446 301 336 338 150 143

Community services 1,436 1,928 2,244 2,366 2,567 2,755 2,232 2,450Works (Administration civil) 244 382 411 458 812 598 817 1,168Highways, Roads & Bridges & Building & Struct. 763 917 524 193 230 1,097 506 397Water Supply and Sanitation 422 619 781 1,086 939 1,035 747 791Public Health Engineering 0 1 1 4 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 1 1 4 0 4 2 0Scientific Research and Survey 0 0 0 0 0 0 12 12Other Community Services 7 9 526 625 586 20 149 82

Subsidies 164 224 100 70 250 550 1,181 587Interest payments 1,226 1,442 1,717 1,920 2,039 2,146 2,409 2,545Grants 0 0 0 0 0 0 0 0Unallocable 0 0 4 0 0 0 300 707

1/ Break down of Capital Development Expenditures is not available.2/For 1988/89 includes Superannuation and Pension amounting to Rs. 1034.6 Mil.Source: Government of Balochistan, Finance Accounts - 1984/85 to 1995/96 & Budget Documents for 1996/97-1997/98.

19

Table 20: Balochistan: Current Expenditures(Rs. million)

1990/91 1991192 1992/93 1993/94 1994195 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

CURRENT EXPENDITURES 5,084 6,522 8,116 8,289 9,596 11,120 12,424 13,992General Administration 1/ 597 713 1,039 1,021 1,116 1,581 1,750 2,046Law & order 520 748 963 932 1,143 1,176 1,132 1,261Defense 0 0 0 0 0 0 0 0Social services 1,388 1,846 2,164 2,439 2,767 3,219 3,475 4,341Education 914 1,254 1,500 1,623 1,869 2,253 2,449 3,042Primary 466 672 836 921 743 933 931 1,183Secondary 195 271 325 341 659 797 970 1,248University & College Edu 151 194 97 214 256 263 212 350Professional & Technical Edu & Teachers Trng 34 37 129 59 76 82 79 109Others 68 80 114 88 134 177 257 153

Health 387 490 561 687 747 821 885 1,122General Hospitals & Clinics 331 412 473 586 617 680 720 931Mother & Child 6 8 10 10 19 20 21 25Other Facilities & Preventive Measures 33 45 53 56 56 64 67 85Other 17 26 26 34 54 57 77 81

Population 0 0 0 0 0 0 0 0Other Social Services 2/ 87 101 103 128 151 145 141 177

Economic Services 615 757 905 967 1,150 1,210 1,334 1,591Agriculture 404 475 594 635 771 810 928 1,100Irrigation 123 163 178 183 205 217 232 310Industries and mineral resources 3/ 53 67 73 78 94 95 64 68Other Economic Services 4/ 36 52 61 71 80 87 110 113

Community services 574 794 1,229 942 1,131 1,238 1,144 1,621Works 244 382 411 458 582 598 817 1,168Highways, Roads & Bridges 201 226 524 193 230 280 0 0Water Supply and Sanitation 122 175 280 277 300 336 304 429Public Health Engineering 0 0 0 0 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 1 1 2 0 4 2 0Scientific Research and Survey 0 0 0 0 0 0 0 0Others 7 9 13 13 19 20 21 23

Subsidies 164 224 100 70 250 550 1,181 587Interest payments 1,226 1,442 1,717 1,920 2,039 2,146 2,409 2,545Grants 0 0 0 0 0 0 0 0Unallocables 0 0 0 0 0 0 0 0

I/For 1988/89 includes Superannuation and Pension amounting to Rs. 1034.6 Mil.2/Includes Natural Calamities and Religious Affairs.3/includes Stationary & Printing.4/Includes Rural Development.Source: Government of Balochistan, Finance Accounts - 1984/85 to 1995/96 & Budget Documentsfor 1996/97-1997/98.

20

Table 21: Balochistan: Development Expenditures(Rs. million)

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98Actual Actual Actual Actual Actual Actual Revised Budget

DEVELOPMENT EXPENDITURES 2,406 3,659 3,086 4,309 4,857 4,619 3,001 2,807General Administration 14 23 0 0 0 7 14 28Law & order 62 53 48 28 37 31 0 0Defense 0 0 0 0 0 0 0 0

Social services 443 868 519 1,671 1,806 1,624 865 736Education 249 583 208 1.110 907 760 469 398

Primary 0 0 0 0 0 0 276 159Secondary 0 0 0 0 0 0 80 52University & College Edu 0 0 0 0 0 0 20 58Professional & Technical Edu & Teachers Tmg 0 0 0 0 0 0 9 29Others 249 583 208 1.110 907 760 85 100

Health 107 114 162 343 484 519 281 254General Hospitals & Clinics 0 0 0 0 0 0 0 0Mother & Child 0 0 0 0 0 0 0 0Other Facilities & Preventive Measures 0 0 0 0 0 0 0 0Other 107 114 162 343 484 519 281 254

Population 18 26 38 57 52 72 0 0Other Social Services 87 170 149 218 415 274 115 84

Economic Services 1,025 1.580 1,499 1,189 1,536 1,441 734 507Agriculture 154 230 156 457 563 389 171 175Irrigation 390 800 921 458 713 801 516 278Industries and mineral resources 1 1 23 37 44 4 0 7 24Other Economic Services 470 526 385 230 256 251 41 30

Community services 862 1,134 1,015 1,423 1,436 1,517 1,088 829Works (Administration civil) 0 0 0 0 230 0 0 0Highways, Roads & Bridges & Building & Struct. 562 691 0 0 0 817 506 397Water Supply and Sanitation 300 444 502 809 639 699 442 362Public Health Engineering 0 0 0 0 0 0 0 0Broadcasting 0 0 0 0 0 0 0 0Urban Town Planning & Regulator Services 0 0 0 2 0 0 0 0Scientific Research and Survey 0 0 0 0 0 0 12 12OtherCommunityServices 0 0 513 612 567 0 128 58

Subsidies 0 0 0 0 0 0 0 0Interest payments 0 0 0 0 0 0 0 0Grants 0 0 0 0 0 0 0 0Unallocable 0 0 4 0 0 0 300 707

Source: Balochistan total (Table 19) and Balochistan current (Table 20) tables.

21

Table 22: Sanctioned Posts by Government(numbers)

1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97

Punjab

BPS 1-15 696,671 709,645 719,681 730,121 721,897 768,647 775,055 777,185

BPS 16-22 54,566 65,495 65,080 89.573 92,161 93,710 94,657 95,754

Special Posts 110 1,569 1,581 1579 1,589 1,610 7,635 7,842

Total 751,347 776,709 786,342 821,273 815,647 863,967 877,347 880,781

Source: Government of Punjab

1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97

Sindh

BPS 1-15 273,862 326,884 339,991 372,192 388,759 383,105 398,178 407,899

BPS 16-22 20,646 24,975 25,958 28,267 33,251 31,847 33,604 34,714

Special Posts 227 2,570 2,570 2,957 2,964 12,911 2,960 2,964

Total 294,735 354,429 368,519 403,416 424,974 427,863 434,742 445,577

Source: Government of Sindh

1989-90 1993-94 1996-97

NWFP

BPS 1-15 173,834 200,260 231,226

BPS 16-22 11,046 19,279 23,361

Total 184,880 219,539 254,587

Source: NWFP: Demands for Grants Appropriations Current Expenditure For 1989-90/93-94/96-97

1988-89* 1993-94 1996-97

Balochistan

BPS 1-15 92,536 110,868 88,660

BPS 16-22 6,306 12,053 38,409

Total. 98,842 122,921 127,069

Source: Balochistan: Demands for Grants Appropriations Current Expenditure For 1988-89/93-94/96-97

'Data for 1989-90 was not available.

1989-90 1993-94 1996-97

Federal Government

BPS 1-15 486,539 457,581 231,654

BPS 16-22 27,077 29,686 22,901

Total 513,616 487,267 254,555

Source: Data for 1989 & 1993 is taken from Management Services Division, Government of Pakistan,

"Federal Government Civil Servants 'Census Report", July 1989 and July 1993, and data for 1996/97 is taken

from Budget Book 1996-97and Office of the Accountant General Pakistan Revenues.

1989-90 1993-94 1996-97

Total National

BPS 1-15 1,723,442 1,879,365 1,736,624

BPS 16-22 119,641 186,430 215,139

Total 1,843,420 2,070,348 1,962,569

Note: Data for 1989-90 includes 1988-1989 data for Balochistan.

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