ISLAMABAD: Amid the tight fiscal position, the Centre is considering ending financing provincial development projects, and instead focusing on five strategic sectors — exports, energy, equity, e-Pakistan and environment (5Es) — in the next year’s Public Sector Deve­lopment Pro­gramme (PSDP).

A senior government official told Dawn that the planning and development ministry had moved a summary to the prime minister for his consent to cap the provincial development projects in the PSDP 2023-24 to be presented to parliament as part of the next year’s budget and also restrict the PSDP to 5Es.

The decision was taken at a recent meeting, presided over by Planning and Development Minister Ahsan Iqbal, with a view to moving forward to finalising the next year’s development budget with clarity after the prime minister’s consent.

PM Sharif has been given a suggestion that only those projects should be included in the PSDP which have a strategic importance and no provincial project of devolved responsibilities should be part of the PSDP, except for the projects of compelling significance which should be funded on a 50:50 basis by the Centre and provinces.

“The provincial development projects in federal PSDP should be capped forever,” the meeting concluded.

The prime minister had been given a rundown on the declining federal PSDP that dropped from about Rs1 trillion in the fiscal year 2017-18 (FY18) to about Rs480 billion in FY22 and less than Rs600bn in FY23 because of resource crunch. This was further constrained by allocation for about 16 responsibilities and ministries devolved to the provinces more than a decade ago.

“The provincial governments should now take responsibility for their subjects in their provincial annual development plans (ADPs),” the official said, quoting the summary sent to the prime minister.

The meeting also decided that the Central Development Working Party (CDWP) would entertain the projects only relating to 5Es.

The official said the planning minister would personally take up the matter with the prime minister this week and take him into confidence given the increasing demands of the coalition partners towards development priorities of their constituencies and requirements of strategic projects of national importance.

Another official was of the opinion that a representative government of major political parties maybe in a better position to reach a consensus on a national challenge like it had taken a series of tough political and economic decisions so far in the larger national interest, albeit with a substantial political cost.

Federal funding

The federal funding to provincial projects in FY22 stood at about Rs310bn which increased to about Rs330bn during the current fiscal year. It may be recalled that 16 federal ministries, along with development projects, had been devolved to the respective provinces following the 18th Constitution Amendment and abolition of Concurrent List.

The financing of projects of provincial nature was discouraged through the PSDP, except for core vertical projects of health and population till 2017. The financial burden on the federal budget, however, kept on increasing despite the fact that its fiscal share in divisible pool fell from over 57 per cent to about 45pc under the 7th National Finance Commission (NFC) award almost at the same time. The provincial projects have since then crept back into the PSDP, leaving a limited fiscal space for projects of national importance.

The PSDP 2021-22 contained about 331 projects of provincial nature worth Rs1.151tr (among 1,190 PSDP projects) and about Rs345bn had already been spent by the Centre on these projects with an allocation of Rs330bn. The Planning Commission wants these projects to be financed by the provinces themselves. It believes that because of provincial burden, the federal mega projects of national importance were suffering on account of cost overruns and delays.

The move towards capping the provincial projects from federal funding comes weeks after the World Bank suggested to the government that it should rationalise its spending by almost Rs2.5tr, starting with diversion of about Rs710bn worth of provincial project financing to federal priority areas.

Debt servicing

The government’s debt servicing cost has been rising tremendously over the years and surged past Rs3.5tr in just first nine months of the current fiscal year compared to about Rs2.1tr during the same period last year. As fiscal space reduces with limited increase in revenue collection, the axe always falls on development spending.

Published in Dawn, May 8th, 2023