Finance Commission: A journey of 30 years | Sunday Observer

Finance Commission: A journey of 30 years

Political transformative changes witnessed in 1987 following the ‘Indo-Sri Lanka Accord’ led to the 13th Amendment to the Constitution providing for the establishment of Provincial Councils. A key objective of the 13th Amendment is to promote regional, social and economic development and enhance responsiveness to the needs of the people.

The Finance Commission was set up under Article 154R of the 13th Amendment to the Constitution in 1987 which is recognised as a key constitutional milestone in devolution of power to provinces both in terms of governance and consequential ‘economic dividend’.

It also constitutes a key policy instrument for regulating centre-province relations in the area of public finance, promoting an equitable, efficient and sustainable Inter-Fiscal Relations (IFR) system.

The Finance Commission consists of the Central Bank Governor, the Secretary to the Treasury as ex-officio members and three other members appointed by the President to represent the major communities, each of whom being a person who has distinguished himself, or held high office, in the field of finance, law, administration, business or learning.

The First Commission was appointed by the then President J.R. Jayewardene on April 5, 1988. A. M. de S. Jayaratne was the first Chairman from 1988 to 1996.

The office of the Finance Commission was set up initially at the Finance and Planning Ministry with a handful of seconded and retired personnel in the first half of 1988.

Main functions and responsibilities

The mandate and the process in regard to ensuring the availability of funds to meet the needs of the provinces as set out in the Constitutional amendment have been carried by the Finance Commission over the past 30 years.

As per the Constitutional provisions of the 13th Amendment, the Finance Commission has to facilitate the process of transferring funds to the provinces for a balanced regional development.

The Finance Commission is empowered to;

• Recommend to the Government “such funds as are adequate to meet the needs of the provinces” from the Annual Budget.

• Make recommendations to the President as to -

a. The principles on which funds granted annually by the Government to the provinces should be apportioned between them for the use of Provinces

b. Any other matter regarding provincial finance referred by the President to achieve balanced regional development in the country.

• Formulate principles to achieve balanced regional development in the country, taking into account the population, per capita income of the provinces and reduce the social and economic disparities and the differences in per capita income of the provinces to reduce social and economic disparities as well as the need to reduce the difference between the per capita income of each province and the highest per capita income among the provinces.

The President shall cause every recommendation made by the Finance Commission under the Article 154 R (7), to be laid before Parliament, and shall notify Parliament as to the action taken thereon. No court or tribunal shall inquire into, or pronounce on, or in any matter entertain, determine or rule upon, any question relating to the adequacy of such funds, or any recommendation made or principle formulated by the Commission.

Demarcation of responsibilities

The 13th Amendment created a provincial sphere of devolved governance by specifying an area of legislative, executive and financial competence to be exercised by the Provincial Councils. The subject of such competence was set out through the demarcation of responsibilities of the Centre (Reserved List) and the Province (Provincial List) and an area of overlapping responsibilities (Concurrent List).

The subjects assigned to the Provincial Councils extend to public services relevant to regional and local development. These responsibilities are supported by the Constitutional provisions for fiscal and financial powers. While the Constitution assigns sources of revenue to Provincial Councils, it also requires the Government annual budget to allocate additional funds to meet the needs of the provinces.

Framework for financing provincial needs

The allocation of funds to meet the needs of the provinces was broadened in 1989 and funds allocated fort Integrated Rural Development Projects were allocated to the Provincial Councils for implementation of the projects.

In 1989, there was a shift to a more coherent framework for financing the provinces, and a study was commissioned by the Finance Commission to review its responsibilities as specified in the Constitution in regard to fiscal devolution ensuring the sphere of provincial finance. The core principles were set out in a Report of Financial Devolution to Provinces on Fiscal Aspects of the Public Sector Restructuring Project, 1989 by Dr. M. R. P. Salgado.

In 2000/2001, on Presidential advice, the Commission perceived the need for oversighting of provincial development programs to ensure that they are strictly in line with the accepted criteria and keep expenditure under constant focus and increase devolved provincial revenue collection.

The revenue sources devolved to the provinces are listed in Sections 36.1 to 36.20 in the List 1 of the 9th Schedule to the 13th Amendment to the Constitution. However, it is noted that the provinces do not have adequate resources to meet their expenditure responsibilities fully.i.e. a mismatch between provincial revenue and expenditure. This will involve greater revenue (tax) raising powers and an effective system of fiscal equalisation (transfers) to address vertical and horizontal fiscal imbalances.

The Commission’s recommendations for funds to be transferred to provinces set out the broad grant framework for financing provincial needs. These include the following grants/transfers;

a. Block grant to meet the recurrent expenditure needs of the provinces

b. Criteria- – based Grant (CBG) to be allocated for discretionary spending by the provinces, to meet recurrent and capital expenditure needs

c. Provincial Specific Development Grant (PSDG) to invest on capital needs

c. Re-introduction of Revenue Performance Grant is under consideration

Performance

The annual reports of the Finance Commission place on record the performance of the previous Commissions and constitute building blocks for fiscal devolution In 2009, the Commission introduced a formula to apportion funds under CBG and PSDG and implementing and monitoring some Foreign Funded Projects in relation to the Health and Education sectors.

In 2011, the Commission focused on strengthening provincial development aligning with national policies by introducing a Medium-Term Planning process at provincial level focusing on national development priorities. For which, Thrust Areas were identified in allocation and apportionment of funds to the provinces ensuring fair distribution of resources among the provinces.

In 2016, the FC carried out an analysis on vertical and horizontal imbalances at provincial level.

Provincial GDP analysis was carried out in the fulfilment of its main mandatory function for a balanced regional development. For, improving organisational efficiency, a Research Unit was established and Management Information System (MIS) is being developed. The Finance Commission Bill was drafted in 2018 as a result of efforts by the Commissions in the recent past and awaiting for the Attorney General’s clearance.

Way forward

The Finance Commission issues guidelines in relation to provincial capital and recurrent needs to assess their needs through need assessment. In 2017, a number of special studies were carried out in support of the Commission activities, such as a study on Provincial GDP Disparities, Expenditure of the Health Sector, Authorities Functioning in Provincial Councils, Progress of Provincial Revenue Collection 2006-2016 and Inter-Provincial Comparison of Recurrent Expenditure - 15. In 2017, the Commission adopted a Code of Governance to improve transparency, accountability and efficiency in functioning of the Commission.

A Common Planning Framework was introduced in 2018, which comprises Components, Sub-components, Broad Activity Area and List of Activity Area under each major development sector in collaboration with the National Planning Department (NPD).

Although the country has spent 30 years with the Provincial Council System, it appears that the objectives of setting up the system have not yet been realised as expected due to a number of reasons of which financial and administrative aspects are vital. In this background, the following suggestions have been made to authorities for their consideration.

In achieving BRD balanced regional development, the Commission apportions funds on a rational basis among the nine provinces. However, statistics point to the fact that such allocations constitute a meagre fraction of the government’s total annual budget, and intra and inter-regional disparities yet continue.

This is mainly due to allocative inefficiencies, regarding which, in the recent past, the Commission has taken positive steps, including promotion of resources mapping, master planning, Database and Management Information System (DBS/MIS) development, promotion of an integrated finance planning between the Government and provinces. Action should be been taken for improved coordination between Government Ministries and Departments and other agencies.

With development planning gaining emphasis, reformulating and re-articulating theoretical and policy views on the globalisation of regional development is also critical.

There is much to be done in regard to fiscal aspects to achieve balanced regional development of the country. In the final analysis, devolution is about ensuring efficiency and equity in making available benefits of the development for each and every citizen in the country.

Lack of coordination between central and provincial level has led to sub-optimal results with wastage, negative economic, environmental and social effects causing a serious dent in the public finances.

It is considered to be a critical issue that needs to be addressed on a priority basis.

The role of the Finance Commission is pivotal as other mechanisms that should be established to ensure the smooth functioning of a multi-level system with national and provincial economies.

In this backdrop, the Finance Commission states that in fulfilling its mandate, the Commission should adopt an integrative approach in social and economic policy making, especially, where the Government and the Provincial Councils have key roles to play in regional development. There is much to be done in fiscal aspects to achieve a balanced regional development of the country.

(Source: Finance Commission of Sri Lanka) 

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