Fixing the NFC award

Building up on our yesterday’s discussion on how to fix the NFC award, the first consultative meeting by PRIME Institute last week concluded with three broad ideas to be deliberated upon in the ensuing months.

First, as Dr. Kaiser Bengali said, the NFC transfers ought to be linked to socio-economic objectives such as health and education. The aim is to ensure accountability of additional revenue and spending by the provinces. This column seconds that notion, which may take the shape of including some kind of social-service delivery index in formula for horizontal transfers. However, it also maintains that provinces’ own revenue collection as a percentage of their potential (either measured as percentage of GDP or of estimates of tax collection) should also be included in the formula for horizontal distribution.

Second, as former Finance Secretary Wajid Rana said at the consultative moot, the overall development spending by the centre or at least those obtained from the multilaterals should be in harmony with the spirit of the NFC award. This is similar to the arguments posed by Dr. Anjum Nasim of the policy institute called IDEAS housed in LUMS.

About two years ago, Anjum and his co-author Ambreen Fatima calculated how Punjab got the highest of electricity tariff differential subsidy (TDS), followed by Sindh, KPK, and Balochistan. However, in comparison to their respective percentage share in divisible pool of taxes under the 7th NFC award, Balochistan and Punjab got a lesser share in TDS than that received by Sindh and KPK (See BR Research columns: Power subsidies: which province gets the most? & Power subsidies: which consumer gets the most? December 24 & 26, 2013 respectively)

The authors argue that these differences violate the spirit of NFC agreement since the centre is using its own share of tax revenues on province-specific expenditures in a manner that departs in a major way from the revenue-sharing arrangement under the NFC award.

The underlying principle behind Wajid’s and Anjum’s arguments seems to be that while the federal government is under no constitutional obligation to follow the NFC in its expenditure allocation, in a federal structure there should be some guiding principles which constrain the arbitrariness of federal government's expenditure allocation. And to that extent the NFC offers an important guiding principle.

There may be every reason for the federal government to depart from the NFC allocation if, for example, a province suffers from a one-time shock such as flood or earthquake. But doing so year after year should raise questions of fairness.

The third idea discussed at the consultative moot is something that Dr. Idrees Khawaja of PIDE has long been calling for: changing the very structure of the National Finance Commission into a three-tiered body by making relevant amendments in the constitution. The base tier (formed at least two years before the NFC award is due) should comprise of academia and representatives of the civil society who should conduct research studies and share it with wider sections of society.

The second tier should comprise of technical representatives from the provinces and the centre who should negotiate on behalf of the provinces where deliberations are to be based on evidence. And the third tier should comprise of political representatives whose job will be to do political negotiations based on the studies of the first tier and the recommendations of the second tier. Idrees argues – and this column seconds – that transparency should be of the highest order at all stages to ensure that the public knows what’s happening.

These are all indeed interesting ideas on the table; hopefully the ensuing discussion and studies will shed more light on the subject. At this point, however, this column will like make two submissions. First, instead of having a one-time award and then going back to the negotiating table every five years, Pakistan should come up with longer multi-term awards, with pre-agreed changes in the formula for horizontal transfer for the ensuing three or four terms (each term being 3-4 years instead of being 5 years).

For instance, in the first term of the award, there could be an indicator for institutional backwardness to help raise funding for those provinces that lack strong institutions or have weak capacity for public service delivery. However, over the course of ensuing terms, the weight of institutional or governance backwardness is gradually reduced to zero, whereas the weight of public service delivery is increased.

This kind of transitory mechanism will allow for weaker provinces to beef their capacity over time, and provide a sense of direction and budgetary guidance for the future.  This mechanism would also allow for one-time negotiations every 12-15 years instead of having it every five years, and would prevent any reason for excuse on the part of any province – the excuse that they didn’t get enough time to prepare or reform.

The second submission is to develop a broader discourse on federalism and decentralisation. The NFC award is just one part of the puzzle. It cannot be divorced from the overall structure of the federation. Any country aiming to become an effective market-preserving federalist country has to satisfy a host of conditions.

These conditions include (a) a hierarchy of governments with each level having a delineated scope of authority; (b) sub-national governments being the principal of both local regulation of the economy and having authority over public goods and service provision; (c) the federal government provides for and polices a common market that allows factor and product mobility; and (d) the allocation of political authority is institutionalized.

To what extent does Pakistan satisfy these conditions, and to what extent do these conditions affect the NFC award? These are also some of the questions that will hopefully be answered as and when the discourse evolves.