Seeking consensus on NFC —Syed Mohammad Ali
Seeking consensus on NFC —Syed Mohammad Ali
The present situation seems to provide the ideal opportunity for the federal and the provincial governments to reach a consensus formula that lays to rest the recurrent contentions about the NFC award
While there are many reasons that can be attributed to the 1971 break-up of Pakistan, the distribution of resources between East and West Pakistan was a major factor. It was to prevent this problem from recurring that the National Finance Commission was constituted in 1974. Unlike India, where the Finance Commission is a permanent body, in Pakistan the NFC meets periodically to finalise successive awards.
The issue of resource distribution among the four provinces has hardly become a smooth process over the past thirty-five years. Now, at a time when the country is confronted with major security challenges, and disgruntlement among the smaller provinces has also reached alarming levels, the current NFC award proceedings have assumed an added significance. The Finance Ministry seems ready to conclude ongoing discussions with the provinces soon, so that the NFC award can be announced soon after Eid. Yet, there are also speculations that the NFC award may have to be put off for a year or two because of paucity of funds and lower growth rates.
Needless to say, despite any modifications in the proportional share of provinces, the amount of actual transfers depends on how big the divisible pool is during a given year. But instead of speculating on whether or not the award will actually be announced soon, or else be delayed, let us instead focus on the current context within which this NFC award will have to be introduced, and identify potential areas of consensus building, which may enable lingering contentions between the provinces over resource sharing to finally be put to rest.
The broader context with which the NFC award must contend includes the security conditions prevailing in the country that have increased the fiscal needs of the provinces. Provincial outlays on law and order are ‘crowding out’ expenditures on social and economic services. On the other hand, all four provinces need to expand social service delivery if Pakistan as a whole is to achieve the Millennium Development Goals by 2015. Given that provincial governments play a key role in providing MDG related services to improve health, education and economic empowerment, it is vital that more resources be transferred to enable the provinces to invest more in social services.
There are also a number of co-existing tensions about inter-governmental transfers. Some of the smaller provinces think that they are unable to provide basic services to their residents because of the diversion of revenues to Punjab. Before attempting to assess what can be done to address these grievances, let us focus a bit more on the nature of the NFC award itself.
The evolution of inter–governmental transfers does have a significant impact on the fiscal status of the four provincial governments. Federal transfers in Pakistan take three forms: 1) divisible pool transfers; 2) straight transfers; and 3) special grants/subventions. Divisible pool transfers comprise the sharing of federally collected taxes between the federation and the provinces in accordance to the provisions of the NFC Award announced every five years. Currently revenue transfers are taking place as per Ordinance No 1 of 2006 made by the President of Pakistan amending the ‘Distribution of Revenues and Grants–in-Aid Order of 1997’.
Population has continued to be the basis of distribution of the provincial share among the provinces. But while prior to the 1990 NFC, 95 percent of revenue sharing was through divisible pool transfers, the share of population based transfers is now estimated to have fallen to 67 percent. But besides divisible pool transfers, the federal government also makes straight transfers to the provinces.
Straight transfers from the federal to provincial governments were initiated in the 1990 NFC award. They now include the development surcharge, royalty and excise duty on natural gas and royalty on crude oil. In addition, the NWFP also receives net hydel profits from WAPDA. Inter–governmental transfers also take the form of unconditional grants, given to provinces, especially the two smaller provinces, to finance special needs.
As much as a third of federal transfers are now said to be distributed on factors other than population, claiming that federal transfers are made solely on the basis of population, to the benefit of Punjab alone may thus be unfair. Conversely, NFC experts in Punjab say that historically the province has had a lower level of per capita expenditure compared to the other provinces. Per capita current expenditure in Punjab is currently only Rs 2,576 per annum as compared to Rs. 4,400 in Sindh, Rs. 2,835 in NWFP and Rs. 4,975 in Balochistan. Still, the fact that there are immense provincial and sub-regional disparities within the country is hard to dispute.
Resisting the tendency to become divisive concerning this issue of resource sharing, let’s just reassert the broader compulsion that an inclusive and sustainable growth path requires focus on alleviating backwardness across all the provinces. As all the provinces are likely to run into fiscal deficits in 2009-10, generally the need for higher transfers to cover these deficits is vital.
Besides relying on population, the provinces’ experts are still lobbying to include other criteria for determining divisible pool shares themselves. The possibility of tax collection being used as another criteria, or else taking into account the size of the province, in addition to keeping in mind poverty and backwardness related compulsions are being discussed, alongside their positive and negative implications. Security based imperatives have also been identified as important issues to be addressed while allocating resources. Moreover, a case of higher overall provinces’ share in the divisible pool is also being made because of expenditure implications of potential transfers of concurrent list functions to the provinces.
It is said that adversity can often provide the ideal opportunity to break deadlocks. The present situation seems to provide the ideal opportunity for the federal and the provincial governments to reach a consensus formula that lays to rest the recurrent contentions about the NFC award. The simplest way to do so would be to multiple criteria and then assign relative weight ranges to each of these criteria, which may be altered as circumstances continue to change.
The writer is a researcher. He can be contacted at ali@policy.hu
