A landmark consensus

By Dr Ashfaque H Khan

The federal and provincial governments have developed a landmark consensus on the Seventh National Finance Commission (NFC) Award after 13 long years. The historic consensus could not have been achieved without the rare display of mutual understanding, accommodation and magnanimity of all stakeholders. The federal government sacrificed its share of resources in favour of the provinces. Three provinces in general and Punjab in particular, accepted a reduction in their shares to provide more resources to Balochistan. Finance minister Shaukat Tarin and Punjab Chief Minister Shahbaz Sharif must be commended on this historic achievement.

The highlights of the consensus on the NFC award include major adjustments in vertical as well as horizontal distributions. In vertical distribution, the federal government has sacrificed its 8.5 per cent share in the divisible pool in favour of the provinces. In other words, the latter would receive 56 per cent of the net divisible pool in the first year (2010-11) and 57.5 per cent during the remaining period of the award. Accordingly, the share of federal government would decline to 44 per cent and then to 42.5 per cent, respectively.

In horizontal distribution, the shares of Punjab, Sindh and NWFP are reduced by 1.27 per cent, 0.39 per cent and 0.26 per cent, respectively. The reduction in total share of three provinces (1.92 per cent) is passed on to Balochistan by increasing its share by 1.92 per cent. Thus, Balochistan appears to be the major beneficiary as its share in net divisible pool would increase to 9.09 per cent from 7.17 per cent. The share of Punjab will decline to 51.74 per cent from the current level of 53.01 per cent. Thus, Punjab will render major sacrifice to provide more resources to Balochistan.

The consensus on multiple criteria as opposed to population being the sole basis for revenue sharing is perhaps the greatest achievement of the award. Pakistan was the only country that used population as the sole basis for revenue sharing. International experience suggests that countries have used multiple indicators for revenue sharing. The most commonly used criteria includes population, tax collection, fiscal efforts of the provinces/states, area and backwardness. These countries have assigned different weights to each indicator. The historic consensus on the award owes heavily to the magnanimity of the chief minister of Punjab for accepting multiple criteria for revenue sharing.

The award is based on multiple indicators which include population with 82 per cent weight, poverty/backwardness (10.3per cent), revenue collection/generation (five per cent) and area or inverse population density (2.7 per cent). Other highlights of the award include reduction in federal tax collection charges from five per cent to one per cent, thus enhancing the divisible pool by four percentage points; and Sindh would receive additional Rs6 billion from federal government, which is equivalent to 0.66 per cent of the provincial pool. Recognising the role of NWFP as a front-line province in the war against terrorism, it has been agreed by all to provide an additional one per cent of the divisible pool to NWFP in addition to the commitment by the federal government to bear all expenses of the war on terror; and accepting sales tax on services as provincial subject which will hopefully be collected by provinces.

Why did the last two attempts to generate consensus on the NFC award (2000-2006) fail? Why did it succeed this time? In my view, two things have made the difference this time as compared to the past. The first attempt was made to arrive at the consensus during 2000-2002 but the provinces could not agree on recommendations owing to their divergent views on resource distribution formula. The second attempt was made during 2005-2006 but it also failed for the following reasons. Firstly, the provinces sent their representatives to the NFC meeting, with resolution passed by respective provincial assemblies on their stand. The representatives would not budge from their stated stand and would show complete inflexibility. This time, the representatives went to the meeting without passing a resolution on their stand from respective provincial assemblies, thus showing greater flexibility.

Secondly, Punjab had taken firm stand on population being the sole basis for revenue distribution and was unwilling to "deviate from its stand even by 0.001 per cent." All the remaining three provinces were equally firm in their stand that multiple indicators should be the basis for revenue sharing among provinces. This time, Punjab and its chief minister showed immense flexibility by deviating from their earlier stance, thus paving the way for historic consensus on the award.

The experts who provided technical support to their respective provinces also played key roles in achieving consensus. In the past two attempts, some experts did not play their fair roles in building consensus for the award.

The Seventh NFC Award will provide substantial resources to the provinces during the next five years. It is now up to them to efficiently use the resources to improve the living standards of their people. Large resources go with greater responsibilities and financial discipline.

The success of the IMF programme will now depend on the financial discipline of the provinces. With rising debt servicing and defence and security-related expenditures of the federal government, a reduction in its share in divisible pool may result in large budget deficit for the federal government. In order to achieve budget deficit target in the range of 2.5 to 3 per cent of the GDP, the provincial governments would have to generate large surplus cash balances. Provincial governments will have to develop the capacity to spend efficiently and effectively. If current spending patterns are maintained by the provinces, then I am afraid that even the large resources will not be enough, thus putting Pakistan's public finance in disarray. I pray that this supposition is proven wrong by the provinces in the years to follow.