The provincial governments promulgated the Local Government Ordinance, 2001 in their respective provinces to install a new integrated Local Government System with effect from 14th August 2001 to function within the provincial framework and adhere to the Federal and Provincial laws. The new system, which may be best described through the 5Ds Local Government System 2001 in Figure-1, reorients administrative system to allow public participation in decision-making. The essence of this system is that the local governments are accountable to citizens for all their decisions. It enables the proactive elements of society to participate in community work and development related activities. It has also removed rural-urban divide.
The new system provides three-tier local government structure in which there is only one line of authority in the district and district bureaucracy is responsible to the elected representatives. More operational autonomy is ensured to the district level offices. Administrative and financial powers of the defunct divisional offices have been, by & large, delegated to the District level.

At the top tier, the District, there is a single integrated local government called District Government Figure-2. The district government consists of Zila Nazim and District Administration. The District Administration, which comprises district offices including sub-offices at tehsil level. The Provincial Government departments decentralized to the District Government, are responsible to the Zila Nazim. The administration is now responsible to serve the people. Adequate checks and balances have been introduced in the System. The new System effectively addresses the specific needs and problems of large cities. In addition to declaration of four provincial headquarters as City Districts, the System has provisions to declare a city/tehsil as City District and Towns when it becomes urbanized and fulfills the criteria of a City District. Government of the Punjab has declared Rawalpindi, Multan, Gujranwala and Faisalabad as City Districts in June 2005.

The middle tier, the Tehsil, has Tehsil Municipal Administration headed by the Tehsil Nazim. The Tehsil Municipal Administration includes the offices and sub-offices of the Urban Local Councils established under the repealed Local Government Ordinance 1979, offices and sub-offices of Local Government & Rural Development, Public Health Engineering and Housing & Physical Planning Departments of Provincial Government entrusted to it for administrative and financial management. In a City District, a Town Municipal Administration is organized more or less on the same pattern as Tehsil Municipal Administration in a common District.

At the lower tier, the Union Administration, which is a body corporate, covers the rural as well as urban areas across the whole district. It consists of Union Nazim, Naib Union Nazim and three Union Secretaries and other ancillary staff Figure-3.

The coordination between the three tiers is ensured through the following arrangements:

The Zila Council in a common district or in a city district, apart from reserved seats for women, peasants & workers and minorities, consists of Union Nazims of all the unions in the district or the city district. Similarly the Tehsil/Town Council, apart from reserved seats for women, peasants & workers and minorities, consists of Naib Union Nazims of all the unions in the tehsil in a common district or in the town in a city district. This provides vertical linkages between the three tiers of the local governments i.e. the Union, Tehsil, and District. Union Nazim and Naib Union Nazim are elected as joint candidates to the Union Council, which consists of thirteen elected members against general and reserved seats including the Union Nazim and Naib Union Nazim.

The new Local Government System envisages formula-based fiscal transfers to the districts through Provincial Finance Awards. To promote trade and commerce in the country there will be no import/export tax or tax on movement of goods through a district. According to the new Local Government System, local governments are not allowed to incur any debt to finance their expenditures.