July 03, 2006	Monday	Jumadi-ul-Sani 6, 1427

THE interim NFC Award announced on January 19, 2006 has beefed up the resources of the provinces in the budget 2006-07 but not by Rs51billion as was claimed earlier.

The gain on “gross” basis from the divisible pool of taxes to the provinces will be about Rs31.1 billion. Certain provisions in the Award have reduced this gain to about Rs17.2 billion.

Hitherto, the provinces were receiving as grant-in-aid (other than octroi and zila grants). In the budget for 2005-06, total grants made available to the provinces on this account aggregated Rs14.9 billion. But the budget for 2006-07 provides of special grants of Rs1.5 billion only. The other provision in the Award relates to discontinuance of grants to provinces in lieu of Octroi and zila tax equivalent to one-sixth of the federal share accruing from sales tax proceeds. The Award now specifically shifts the burden from the federal government to the provinces by providing that this one-sixth share will be deductible from the net proceeds of the provincial share of sales tax in the divisible pool.

The provincial governments shall transfer such amounts to the District Governments and Cantonment Boards without retaining any part thereof.

In the budget for 2005-06, the federal government had provided for transfer of a sum of Rs26.4 billion to the provinces out of its share for support to the local governments. The entire financial burden will now be borne by the provincial governments out of their share from sale tax proceeds receivable by them out of “divisible pool”. To partially offset negative effect of the provisions on overall resource position of the provinces, the interim Award provides for a fixed amount of Rs27.750 billion as subventions grant-in-aid to the provinces, to be distributed in the ratio of 35 per cent to NWFP, 33 percent to Balochistan, 21 per cent to Sindh and 11 per cent to the Punjab.

Out of this amount, the budget provides for transfer of Rs9.7 billion to NWFP, Rs9.2 billion to Balochistan, Rs5.8 billion to Sindh and Rs3.1 billion to the Punjab. On the basis of estimates of the net increase in resource transfer to provinces out of the interim Award, the figure works out to Rs17.2 billion only as against gross increase of Rs31.1 billion due to increase in vertical share in the divisible pool from 37.5 per cent to 41.5 per cent. The provinces depend heavily on resource transfer from the federal government even for performing their existing functions. This dependency ratio differs from provinces to provinces. Balochistan depends on federal transfer to the extent of 95 per cent for meeting its expenditure needs, NWFP 92 per cent, Sindh 85 per cent and the Punjab 80 per cent. The additional resources as provided in the 2006-07 budget will hardly reduce the dependency of the provinces on the federal transfers. As regards the district governments and Cantonment Boards, discontinuance of transfer of resources equivalent to one-sixth of federal share of sale tax proceeds from the “divisible pool” and its substitution with transfer from the share of provinces to the district governments and Cantonment Boards will reduce ‘net’ resource transfer by about Rs11.4 billion on account of a lower vertical share of the provinces in the “divisible pool” than the federal government.

Under the Devolution Plan, a number of functions have been devolved to the district governments, Municipal and union administrations under part A,B,C and D of the First Schedule of the Local Government Ordinance. For performing these functions efficiently, the local governments require substantial resource transfer from the federal government as well as provincial governments.

However, the local governments which are already starved of resources will face a reduced level of Rs11.4 billion in the resource transfer due to a change in the formula in the interim Award. This is likely to render them ineffective in discharging their functions. The 2006-07 budget transfers additional revenues of Rs17.2 billion to resource starved provinces. This may help tide over their financial difficulties. However, the interim Award skirts the fundamental or core issue of fiscal autonomy that the provinces have been demanding to perform better.

And these concerns of the provinces were publicly articulated by the President himself on February 23, 2005. He had advised the federal government to do away with the concurrent list and share the revenue resources on 50-50 basis.

He had interlinked the two issues into one as the revenues are needed for performing the functions cost-effectively and efficiently, assigned to each tier of the government in the federation. It is indeed surprising that the interim Award did not touch upon the issue of transfer of functions to the provinces that the president had himself espoused so as to complete the cycle of devolution.

Decentralisation or devolution is a world-wide phenomenon over the past thirty years and most states-even the most centralized states-are moving towards the goal of devolution by de-concentrating political, administrative and fiscal power at the highest tier of the government.

There are a number of reasons for following this trend. First, it is realized that functions that are of local nature can efficiently be executed at sub-national government level.

Second, with decision being made at local level, resource wastage is avoided.

Third, the involvement of communities and civil society organisations in decision-making increases political power of people, as expressed through sub-national governments, and promotes grater democratisation of the societies.

Fourth, it promotes good governance which is not ensured through centralized bureaucratic model. The administrative and political decentralization in a state particularly in a federal state with functions assigned to each level of sub-national governments presupposes grant of a certain degree of fiscal autonomy and authority.

This is ensured through three types of measures. First, taxation bases are assigned to each level of government in order to control their own sources of revenues with autonomy to impose taxes, set rates and administer them.

Second, a system of fiscal transfer mechanism from “divisible pool” is evolved for transfer of resources from higher government to lower government.

Third, a mechanism is put in place for ensuring participation of constituting units of sub-national governments in the overall management of public finance. One hopes that the issue of transfer of functions from the federation to the provinces will be resolved as per guidelines given by the President and a regular NFC Award will be made to reduce the dependency of the sub-national governments on federal resources by granting them fiscal autonomy.