AT the heart of the controversies surrounding Census 2023 is the National Finance Commission award that determines the basis of financial flows from the federation to the provinces. The current formula rewards the provinces that record higher population growth rate and occasionally brings the simmering differences between more populous and less-populated provinces to a boiling point. The NFC award criteria has simply failed to keep pace with the changing times.
Instead of serving as a catalyst for accelerated and inclusive development, the NFC award has perpetuated elite capture and a political system that does not rest on local governance and service delivery institutions. Each chief minister annually receives an envelope from the federal government. Based on an unsustainable formula, he spends it all without worrying about the provincial financial commission and without systematically transferring resources to lower tiers of government. This mechanism does not address increasing poverty, climate vulnerability, degrading physical environment, and falling quality of life indicators. In this system of top-down dispensation, the envelope is delivered without building mechanisms for performance, resource efficiency, transparency and accountability.
The soul of the NFC award continues to be a prisoner of the colonial purpose defined by Sir Otto Niemeyer in 1936 and later adopted by Liaquat Ali Khan’s finance minister in 1951: the central government will collect and distribute the collected revenue to the federating units. The focus was on strengthening the capacity of the central government to collect taxes. Strengthening capacities of the federating units to generate and collect revenues was not the objective. There was no room to tax and spend locally. The same principle has continued to drive the federal-provincial financial allocation system.
After East Pakistan left the federation, population was adopted as the sole basis for distribution of finances. Hence, the NFC award began to increase economic and social disparities between the provinces and widened the development gap between less and more populated regions simply because more financial resources were flowing into more populated areas.
The existing formula should be revisited in order to respond to the emerging provincial needs.
This arrangement continued for 50 years and was revised only by the 7th NFC award in 2009. A new beginning was made by revisiting the formula and reducing the weightage of population to 82 per cent, resulting in 5.2pc reduction in Punjab’s share. The sum that accrued created space for three additional parameters: poverty and (economic) backwardness (10pc), revenue collection and generation (5pc), and inverse population density (2.7).
This formula can be distilled into four guiding principles that can help shape future NFC awards. First, it recognised the principle of give and take, whereby for collective benefit a province allows reduction in its given share. Second, poverty and economic backwardness were recognised as a shared concern by all provinces. Third, revenue collection and generation capacity in the provinces was recognised as a source of prosperity for all federating units. Fourth, affirmative action was taken to cater to the special needs of some federating units.
Regrettably, successive governments have failed to build upon these principles, despite some significant enabling changes introduced by the 18th Amendment. The amendment transferred 17 social sector ministries to the provinces and made it mandatory for them to make local governments functional. In reality, the then existing local governments have been withdrawn by violating the constitutional amendment. Subsequent awards, if issued, should have redefined and refined these parameters, or simply revisited their respective percentages in order to respond to the emerging provincial needs and demands — a task that is staring in the face of the present government.
Successive federal governments have invoked debt servicing, defence, terrorism, merger of Fata with KP, the Covid-19 pandemic and climate induced-disasters to revisit the existing formula, while GB is knocking on the door for its fair share. Rather than ring-fencing, Islamabad has undermined the NFC award by randomly accessing it for contingencies.
This dysfunctionality is an inevitable result of an overly centralised system that denies the provinces powers to generate and collect revenues except through property and agricultural income taxes, the latter remaining a pipe dream. Likewise, the federal government is accused of defining the services sector arbitrarily to increase its own share.
Finally, the efforts to weave environment and climate resilience in development planning has been far from successful since the efforts at national and provincial levels began in the early 1990s. This has made Pakistan a high-risk country, routinely suffering unbearable losses and damages. The 2022 floods alone cost over $30 billion. The NFC award is an underutilised policy instrument for Pakistan to adopt a climate-smart development pathway. Climate-compatible NFC awards can help to systematically pursue SDG targets and build climate resilience.
Given the present transitional nature of the polity, it is unlikely that the government can constitute the commission, or muster a new consensus. What then are the government’s options for immediate remedial measures? Creating a national pool of funds to manage contingencies.
In operational terms, the government may like to roll back the 1pc fund that was set aside for KP to tackle terrorism, now that it has been largely tamed. The provinces have been asking to bring this pre-allocation to a closure. Herein lies an opportunity to repurpose this allocation as an inter-provincial climate risk pool. This fund can lend collective support to the provinces immediately following any climatic disasters. Timely support will save ongoing projects from repurposing and skimming from the development portfolio. This practice has already robbed the country of important development projects at least twice, first to combat Covid-19 and then to meet the emergency requirements of last year’s floods.
The creation of such a fund will help foster a national policy dialogue on climate risk management. The global experience is that such funds help increase impact by developing pre-agreed disaster response plans, initiate insurance solutions for infrastructure, crops, livestock, and housing. The creation of a dedicated fund by the NFC can help upfront payments of insurance premiums and enable a shift toward proactive risk management. If introduced, it can help Pakistan meet her SDG targets and lay the foundation for a climate-smart NFC award.
The writer is an expert on climate change and development.
Published in Dawn, June 1st, 2023