I often explain the idea of a three tiered federation as a three storied structure. Just as a structure would not be stable without a solid foundation, we cannot build a system of governance that works without addressing the fundamental reasons for the need of a government i.e. the basic services to the citizen. As Punjab, the only province without elected local governments, embarks on the ambitious journey of establishing yet another local government system, it is imperative to address the elephant in the room: economic sustainability. Pakistan is a resource-starved country grappling with severe fiscal challenges at all levels. In this context, the potential of local governments to generate their own revenue and explore financial tools that can facilitate municipal infrastructure and services is not just an option but a necessity.
Pakistan’s current economic predicament demands innovative solutions. The fiscal constraints we face are not merely numbers on a balance sheet; they translate into real-world challenges in governance and public service delivery. Empowering local governments to generate their own revenue can provide a sustainable path forward for the longevity of the third tier and to address real life issues such as sanitation, clean drinking water, safe and clean streets, etc.
A key area ripe for reform is property taxation. In Punjab, the property tax system is outdated and can be traced back to 1958, this tax law does not take into account the value of the property or the size of the lot a property is built on. Chennai, a city comparable to Lahore in terms of its population, generates more property tax than all of Punjab combines. To add to this, in an era where it is hard to distinguish between urban and rural, especially in dense central Punjab, there is no concept of property tax in rural or suburban areas. This absence is a significant missed opportunity for revenue mobilization of taxes that are actually plugged back in services and aren’t spent on foreign debt servicing or other big ticket items. While we think about strengthening the third tier, we must focus on unlocking substantial revenue streams that can help build better cities and communities.
Punjab can also benefit from leveraging innovative financial instruments. Municipal bonds, for instance, are the biggest source for funds for municipal finance and can offer a promising avenue for funding large infrastructure projects in large cities. This approach not only provides the necessary capital for infrastructure projects but also encourages fiscal discipline and transparency. We have developed a mindset that mega projects have to be fully funded by the balance sheet, especially at local and provincial levels, at a time when we are falling behind the world in terms of our progress on the Global Goals. Roads, bridges, underpasses, mass transit are some of the projects that can very easily be funded through bonds, PPPs or a mix of debt and equity.
Beyond traditional taxation, tools such as land value capture and tax increment financing present untapped potential. Land value capture, used effectively in countries like Brazil, allows local governments to benefit from the increase in property values driven by public investments.
Tax increment financing, on the other hand, enables the use of future tax revenues to fund current projects, creating a cycle of reinvestment and growth. The creation of business improvement districts (BIDs) is another innovative approach. BIDs enable areas like central business districts to self-fund their services through additional taxes or fees paid by businesses within the district. This model has proven successful in various parts of the world, including Latin America, where BIDs have led to significant improvements in urban management and service delivery.
As we struggle to build this third tier of governance in Pakistan, let us lay a foundation robust enough to support not only today’s needs but also the aspirations of future generations.
Strengthening local governments is not just an economic imperative—it is the cornerstone of a prosperous and resilient Republic.
