Economic Reforms – XLVII

Economic Notes

Economic Reforms – XLVII

Waqar Masood Khan

We now turn to the main features of the 7th NFC Award. After agreeing to a set of issues that the NFC were to consider, working groups were constituted to make recommendations for their resolution. Some of these matters have already been covered in the last Part (News: 20-3-2019). The major issues required resolution were vertical distribution between federation and provinces and horizontal distribution among provinces. Then there was the question of benchmarking revenue requirements based on expenditure projections.

Historically, the exercise of expenditure requirements has been controversial because every unit would attempt to overstate its requirements in the hope to secure a larger share. It is therefore not surprising that despite carrying out this exercise, the distribution of resources was only tangentially concerned with expenditure projections. There were projections of revenues, expenditures and borrowing but those were not the basis of vertical transfers. How it was arrived at, we would see shortly.

The first meeting of the Commission was held on 27-28 August 2009 in Islamabad and then it moved to all the provincial capitals and finally it held its sixth meeting second time in Lahore, for four long days on 9-12 December 2009. The Chief Ministers of provinces also joined the negotiations. In a dramatic development a record note was signed by the members duly endorsed by CMs, announcing the agreement on the Award. It was only the 108th day since the first meeting. No previous democratic government since 1991 had reached an agreement on the Award. [1997 Award, which was reached in less than 100 days, was given by an interim government]. As we would see, if the federal government is willing to concede provincial governments’ demands, reaching an Award is not a challenge.

In a radical departure from the approaches of past Awards, the 7th NFC set the following principles to determine the Award:

“The approach adopted by the seventh NFC is rooted on the premise that most of the development work needs to be initiated at the provincial level to ensure results at the grass roots level. Furthermore, the responsibility of providing social sectors services also rest with the provincial governments. As such the needs of the provinces must be addressed first. The Commission was also of the unanimous opinion that the vertical programs of the Federal Government were not providing the desired results and should be thus reduced. Instead greater resources should be placed at the disposal of the provincial governments. The Commission was also of the view that there is a duplication of functions i.e. the same functions were being performed by departments of the federal and provincial governments resulting in wastage of government resources. Thus, instead of determining the expenditures requirement of the federal and provincial governments simultaneously, in the first instance the requirements of the provincial governments would be assessed and worked out, and the share of the provinces in the Divisible Pool Taxes net would then be determined. After setting aside the provincial shares, the federal expenditures would be adjusted to maintain the borrowing level at an acceptable level”.

Clearly, there was an abdication of federal responsibility in terms of its constitutional responsibilities. In fact, it was an indictment of federal government’s role in fiscal affairs. The primacy of provincial expenditures or abandonment of federal space of responsibility was unprecedented. An Award is reached when a unanimous recommendation is made by the Commission, which is binding on the President to implement. Unless this happens, no Award is possible. Thus, there was no compulsion for the federal government to accept such vast amendment in fiscal responsibilities in favor of provinces. However, the stage was set to transfer a major share of divisible pool, which was as broadly defined as was done in the case of 1997 and 2006 Awards.

Based on the above principles, the federal government voluntarily made an offer to increase the share of provinces to 55% in the divisible pool. However, on the insistence of the provinces, it was agreed that in the first year of NFC i.e. 2010-11, the provincial share would be 56% and for the remaining years the share would be increased to 57.5%. In another remarkable development, the federal government agreed to reduce the cost of collection from 5% to 1%, thereby enhancing the divisible pool by another 4%. Additionally, it was agreed that 1% of the divisible pool would be set-aside for NWFP as cost of war. Interestingly, this subject was not part of the terms of reference issued by the President for the Commission.

There were many more deductions from the meager share that the federal government was left with. First, as we had already noted in the last Part, a GDS liability of Rs.10 billion were to be paid over a five year period. Second, there was an outstanding arbitral tribunal award of Rs.110 billion against WAPDA on account of net hydel profit, which was also agreed to be paid by the federal government, Rs.10 billion immediately, and Rs.100 billion to be paid over a next four years. [In 1991 NFC it was decided that this was the liability of the generating company].Third, Sindh Government was given an additional grant of 0.66% of its share in the divisible pool. Fourth, the Balochistan government was given an exceptional treatment by assuring a fixed amount of transfer irrespective of actual tax collections, the difference to be made up by the federal government.

It may be recalled that the Musharraf Award of 2006 had already pushed the share of provinces from 37.5% to 41.5% in 2006-07 and which was to gradually increase to 46.5% in 2010-11, the last year of the Award. In sharp contrast, the 7th Award gave a ten percentage points increase in provincial share in the first year and then added another one and half percentage to take it to 57.5%. Note that this is not the share out of the divisible pool of the past. The pool was increased by 4% by reduced cost of collection besides additional deductions from the remaining share of the federal government. This Award would leave federal government hugely handicapped to run its finances from its share in revenues. [To be continued]

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