Although the National Finance Commission (NFC) has done its job and prepared the Award for the federation, it appears that overall consensus has yet to be reached as to how the national resources will be distributed between the federal government and the provinces and also among the provinces themselves.

The latest offer to the provinces is 47 per cent from the divisible pool which is a substantial improvement over the last award where provincial share stood at 37.5 per cent.

It is obvious that provinces might have been contemplating a higher figure of even 50 per cent but important decisions like the NFC awards are never that straightforward and have to take into considerations several factors to arrive on a workable formula.

In recent times, most of the governments in different countries around the globe are striving to improve their record on good governance. The quest is on for a system, which is an embodiment of equality, justice and fair play in administrative and financial matters.

It has been observed across the wide spectrum of governmental affairs that at each level of government in a federation there are different challenges and expectations.

The federations are formed because different groups, communities living in distinct administrative units like provinces or states, decide to come within a well-defined bound of nationhood for prosperity and betterment.

Despite all the talk about market approach and less governmental interference in the affairs of citizens, there are still large number of people who would look towards governments to redress their problems.

It has also been observed that democratic governments are equally eager to ensure that their citizens get the best of the deal. This situation is only possible when the principles of good governance are adhered to and the decision making process is brought closer to the people who matter most.

Administrative and financial decentralization in running the affairs of the government is the current theme. Hitherto accepted dogma of central governments controlling most of the functions and resources is fast giving way to devolution of power at lower levels of government and greater financial autonomy to the provincial or state governments.

What we are seeing in the recent NFC Award is essentially a kind of fiscal federalism which deals with the degree of devolution, assignment of expenditure and revenue arrangements.

There are three different tiers of government under federal structure i.e. federal government, provincial governments and the local governments. Each one of them has to perform certain functions within their jurisdiction; therefore, it is imperative to keep in focus the complexities involved in intergovernmental fiscal relations.

The provinces when asking for a bigger slice out of the 'pie' are in fact looking at the vertical imbalance but they ought to take consolation from the fact that the federal government's role in particular spheres like foreign affairs, macroeconomic framework, administration and defence necessitates a sizable chunk which may exceed their expectations and hence need for a compromise.

Another justification for inter-governmental fiscal transfers is based on the need to address horizontal imbalances. The federal and provincial governments do realise that some jurisdictions may have better access to natural resources or tax bases that are not available in others.

Similarly, some may have higher income levels than those of other jurisdictions i.e. differences in fiscal capacities. In other cases, some jurisdictions may have extra ordinary expenditure needs, because they have high proportion of poor, lack of infrastructure etc. and therefore the central government has the obligation to maintain a minimum standard of public service in all sub-national units and assist or subsidise regions which have insufficient resources.

It is apparent that for a country like Pakistan there are two overarching considerations for a more meaningful distribution of national resources and these are - bridging fiscal gap and reducing regional disparities.

The provinces are wary of the fact as to how massively are they dependent on tranches from federal government when preparing their own annual budgets. The dependency ratio which is around 1:5 is too high compared to some other countries with similar structures like Brazil 1:1.03 or Argentina 1:1.3 etc.

Thus Pakistan happens to be an extreme case of vertical fiscal imbalance. To facilitate consensus of provinces for the new NFC Award, it would be fair to look at other countries with similar federal structures and how those countries are practising fiscal federalism.

The country experience is important as some countries have more taxes to share with sub-national than others. In case of Argentina, almost half the proceeds of major taxes go to sub-national government. Mexico, on the other hand, would just share income tax.

The sharing criteria amongst sub-national government again varies with individual country. In almost all cases, population is the key factor, though in most cases collection is equally given due weightage ranging from as little as 5 per cent in case of Nigeria to as high as 100 per cent in Malaysia. The population factor is definitely the key element but its weightage in other countries does not seem to cross the threshold of 70 per cent.

Reverting to the present situation, it is important that NFC Award is accepted by all parties as soon as possible to avoid any uncertainties and negative effects it may have on growth and prosperity of the regions and the country. The chances are that not all the provinces will be gaining as much as they originally perceived and may not necessarily be too happy with the dispensation as and when a final compromise is made. What they need to be assured is that all the parties are in fact better off and stand to gain substantially compared to previous arrangements. If marginal adjustments in the awards could help in achieving the consensus, it would definitely be a worthwhile effort.

An important thing to observe is that acceptance of NFC Award would not be an end itself, rather it should herald in an era for greater understanding of intergovernmental fiscal relations and how best the present system could be improved and made to work to take care of issues and concerns which rank high in terms of priorities for the provinces. Perhaps the starting point could be to take a fresh look at the Constitution, particularly those sections which relate to finance.

Under Article 160 of the Constitution of Pakistan, the President constitutes a commission which makes recommendations on distribution between federation and provinces of the net proceeds of the taxes that are mentioned in clause (3) i.e. taxes on income, including corporation tax, taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed; export duties on cotton etc. other taxes and duties as may be specified by the President of Pakistan.

An important aspect is that most of the taxing powers under the Constitution remain with the federal government like income tax, tax on capital value of assets, excise duty, customs duty, taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed while the provinces are allowed taxation power and authority in respect of taxes not specified in the federal list.

In fact the provincial taxation authority on residual basis includes agricultural income tax, capital gains tax on immovable property, excise duty on alcohol, liquors and opium, tax on professions, trades and calling, tax on immovable property, land revenue, motor vehicle taxes, stamp duties and taxes on purchase and sale of services (transferred to federal government for setting rates and collection).

Despite an array of above mentioned taxes, the provinces still lag far behind in terms of matching these with the anticipated expenditures unless the federal transfers are affected for producing a balanced budget. If it is desired that in future heavy dependence on federal transfers should be reduced and provinces be able to generate more of their own resources, then there would be a need to identify new tax bases and revenue generation mechanism for further resource mobilisation. The National Economic Council could also play an important role in specifying taxes as it deems appropriate.

One of the problems with the NFC awards in the past has been that actual disbursements of funds on yearly basis have been way below the projected levels, something in the region of 70 per cent.

This may be due to the fact that either the provinces may have been slow in terms of utilisation of budgeted amounts or else the release procedures and conditions may not have been met.

Whatever, this gauges the performance of the NFC on the one hand and prompts provinces to step up efforts to increase the pace of utilisation of funds with maximum benefits to the people.

Considering the past experiences, it is important if the NFC secretariat is established on permanent basis. It will enable the NFC to hold annual meetings regularly and monitor how the Award is working, particularly keeping tabs on the projected shares and actual releases to the provinces.

It will also accord opportunity to the provinces to come up with definite ideas on tapping own resources and accelerating efforts where possible for further resource generation.

Concluding one could say that an earlier consensus on NFC is vital. The annual budget exercises are on and it would be much appropriate and expedient that instead of creating different scenarios for the annual budgets, the federal government and provincial governments go into final phase of budget preparation with clear focus and full commitment to move on and embark on a sustained development programme.