A new World Bank financed fiscal and governance reforms project, Punjab Resource Improvement and Digital Effectiveness (PRIDE), will target to help Punjab increase efficiency in its public expenditure, close its large tax gap and create fiscal space for growth-enhancing expenditure on infrastructure and human capital by deepening ongoing public financial management reforms.

The five-year programme also incorporates the use of Information and Communication Technology (ICT) to support service delivery in the wake of the Covid-19 health crisis — both during the pre- and post-recovery period — while also supporting reforms to improve the management of emergencies and mitigate disaster risks in the future. The programme supports Punjab’s development response to the Covid-19 challenges as it tackles the key reform actions that are not amenable to private sector financing.

The bank had approved soft financing of $304 million for the $554m project last month. The remaining amount of $250m will be contributed by the Punjab government. The release of the bank’s funds will be tied with the achieved measurable outcomes of the programme that will be implemented by the provincial finance department.

The reforms are intended to support the implementation of government policies, improve service delivery, and reduce fiduciary risks by strengthening budget formulation and fiscal risk management, as well as through the increased use of digital technology for delivery of selected public services.

At present, the province’s tax receipts account for only 0.8pc of the estimated provincial economic output, indicating that the province may be collecting only a quarter of its tax potential

Punjab has made significant progress in public financial management reforms during 2015-20, expanding the sales tax on services base and increasing collections from Rs43 billion in 2012-13 to Rs106bn in 2019-20, completing the digitisation of urban immovable property tax records with the addition of more than one million new properties to the tax net, automating property tax invoice system and rural land records, and digitising stamp duty.

The government intends to deepen these successes through additional investment for addressing three recurring problems: weak systems for managing fiscal risks, low levels of Own Source Revenue (OSR), and inefficiencies caused by limited use of technology in the delivery of public services.

The reforms are expected to create additional fiscal space of nearly Rs274bn by 2024-25 for the provincial government, according to the appraisal documents on the loan.

The document says the improvement in OSR is expected to add $626m over the baseline by 2024-25. Increases in pension fund footing are expected to provide $597m and the estimated gains from digitisation of the local government service delivery are projected to be $314m in the medium scenario that assumes 10 per cent efficiency gains. The total projected net benefits realised through the efficiency gains from improvements in Punjab pension fund management, adoption of e-procurement and digitisation of local service delivery and increase in own source collection are valued at around $1.3 billion.

The provincial tax governance reforms are probably the most crucial part of the agenda set by the programme for the Punjab government. At present, Punjab’s own tax receipts account for only 0.8pc of the estimated provincial economic output, indicating that the province may be collecting only a quarter of its tax potential.

The World Bank estimates Punjab’s tax potential at Rs400 billion, with the largest revenue potential in sales tax on services, urban immovable property tax and stamp duty. In the medium term, the province can capture much of this potential revenue by broadening its tax base through improvements in tax administration and policy without imposing new taxes or raising rates. To do this, Punjab should enhance cooperation between its three tax authorities to facilitate compliance; tackle tax evasion (for example, by data integration, third-party data links, and audit); and reduce the cost of tax collection. Likewise, the programme also suggests streamlining tax instruments by abolishing some minor taxes with low revenue potential and combining the collection of similar taxes to reduce compliance costs for taxpayers and administrative costs for the tax authorities.

“Simplification of business processes and increased automation in the province’s three revenue collection authorities can also contribute to the province’s goal of improving the business environment through taxpayer facilitation measures, including online filing of tax returns, e-payments, and refunds system,” says the programme appraisal document.

According to the bank, technology platforms for service delivery in the province are still not integrated. Nor are they interoperable despite some progress in simplifying government procedures and use of technology. The government needs to expand its existing citizen feedback model, accelerate the use of technology in procurement and digitise key services both for citizens and for routine administrative operations of government to facilitate business continuity during future emergencies.

The effort to increase OSR is to be accompanied by expenditure reforms to address the challenge of fiscal risk exposure resulting from a large pension spend which currently stands at 12.3pc of the provincial revenues and is projected to rise to 23pc of the total revenues by 2060. There is also considerable uncollateralised debt stock arising from trade in agricultural commodities — worsened by the lack of transparency on policy, operation and the actual debt numbers. Finally, the large number of state-owned enterprises and public-private partnership (PPP) projects, with increased provincial guarantees, and the lack of capacity to assess the impact of these guarantees, only heighten Punjab’s fiscal risks.

Published in Dawn, The Business and Finance Weekly, November 23rd, 2020