KARACHI, June 8: “Pakistan’s turbulent history has combined with a post-World War Two concept of development to create a highly centralized political and fiscal system.”

“This centralization is widely regarded as a major factor in its poor recent record of economic growth, poverty reduction and social progress.”

This is how a World Bank report “Pakistan Development Policy Review” sees the current system of governance, which is being re-orientated to suit the emerging market.

Describing district governments “as the first phase of a new federalism”, the report observes “if the next difficult step from political to fiscal de-centralization” can be taken, (it will take time) and with stakeholders on board, the system has the potential to deliver better services.

To strengthen provincial autonomy, the World Bank is providing soft loans directly to the provinces with guarantees provided by the federal government. Sindh will receive $100 million in the next fiscal.

As latest evidence indicates, devolution can impart efficiency not only to governmental activities but also to the corporate world. Devolved corporate managements are improving productivity, cost efficiencies and profitability.

In fact, along with deregulation, technology and innovation, devolution is helping firms improve productivity in most difficult and trying times.

Aware of the growing global competition, the leading manufacturers of composite textile mills are focusing on devolution to improve cost efficiencies and increase profitability. Under the de-centralized system, each unit in a company is responsible for its own profitability, reveals a study by a brokerage house.

Nishat Textile Mills is one example. It is a composite unit, which integrates the main manufacturing processes such as spinning, weaving, processing and stitching.

Each processing unit, however, works independently as a separate profit centre, observes the study. For example, the spinning unit of the Nishat Mills sells its yarn to the highest bidder regardless of whether the buyer is internal or external.

In case of equal bids, the first priority is given to the internal weaving department. With each unit responsible for its own profitability, a significant portion of the manufactured yarn is exported.

The weaving department procures most of its yarn from the local market to meet its requirements. Sales are competitively priced amongst the target markets, which comprise inter-company, local and export markets. Nishat Mills exports more than 80 per cent of its output. Its operating profits have risen to Rs324 million in first quarter of the current fiscal as compared to Rs302 million in corresponding period last year. Nishat Mills is being run by one of the top and most successful business families.

Within an autonomous corporate entity, it has come to be realized that centralized decision-making is a drag on efficiency.

In many multinational companies and foreign banks, heads of various business units report directly to their counterparts in parent companies. After the take-over and re-organization by Chevron Texaco, the post of managing director of Caltex Pakistan, is expected to be abolished when the incumbent’s contract of service expires. In Citibank, the country head is expected to liaison with the government and is responsible for his own business unit.

The issue of more equitable sharing and more efficient use of tax revenues and other natural resources between three tiers of the government — the federation, provinces and districts — is on agenda of the National Finance Commission.

A decision has, however, been taken in respect of funding of district government. In the next fiscal, the district governments would be entitled to 2.5 per cent sales tax in lieu of octroi and zila tax that has been abolished.

How the resources would be shared by the federation and provinces is still being debated with reports that the National Finance Commission Award would be delayed by a year. The new NFC award is to become effective from July 1, 2002.

Without fiscal federalism and equitable sharing of rights and responsibilities, good governance would remain as illusive as ever. A highly centralized system cannot sustain a constitutional and civilian rule and makes representative democracy unworkable. And the political instability that it creates, retards economic and social progress. Political turbulence is explained by the existence of a highly centralized system.