The fact that Pakistan suffers from multi-facet disharmony and discontent is widely recognized. Although several causes exist for such a predicament, the NFC award and its application from time to time is the most serious reason for causing inter-provincial disharmony.

In an expected move on January 29, the Sindh Assembly passed unanimously a resolution demanding that a new National Finance Commission (NFC) be reconstituted as a matter of top priority. The resolution also asked for substantial amendments in the bases of the existing NFC award. Subsequently the Chief Minister of Balochistan also expressed similar views. Other provinces may also follow suit. The demand that a new NFC be reconstituted does not pose any problem. On the contrary, it is quite logical to reconstitute a new NFC after the restoration of democracy.

So far as change in NFC formula is concerned, the Resolution asks for (I) a reduction of the federal share in the divisable pool from 62.5 per cent to 55 per cent; and (ii) fixation of contribution by each province to the federal divisible pool on the basis of its respective population. This implies that after deduction of 5 per cent as collection charges and 3 percent subvention for Balochistan and 2 percent for NWFP, each province will pay to the federal share of 55 percent on population basis and then retain the balance amount of the divisible pool taxes collected in its jurisdiction and credited to its account. The reduction of federal share should not present much difficulty. The federal government has been moving to this goal. An indication was given by the finance minister of the outgoing regime that the share of the provincial governments would increase to the level of 42 to 44 percent. Hence this can no longer be a cause of friction. The major cause of friction during the last two decade has been on two counts. Firstly the distribution from the divisible pool on the basis of population and secondly the failure of the federal government to meet its commitment in its entirety to all the provinces. In other words, provinces were given much less what was committed, even on the basis of population. In particular, Sindh has been extremely dissatisfied. As indicated by the leader of opposition in the Sindh Assembly that in recent years, the province received much less than was committed. As a result, the shortfall amounted to Rs. 80 billion. This aspect needs special attention by the new NFC to alleviate disharmony. Sindh has been very critical that it contributes about 70 percent to the divisible pool but receives only about 23 percent. For the last two decades, it has been a continuing demand of the three smaller province not to use only the population —— but also other criteria like incidence of poverty, quantum of revenue generation, and their level of economic development but to no avail.

The second demand does present some difficulties but given the political acumen and understanding, it can be resolved satisfactorily. The protagonist of the demand claim quite logically, that the contribution to the divisible pool should also be on the basis of population. If we can accept population as the criteria for distribution, why it should not be accepted as a criteria for contribution. Several countries both in the developing and developed world use this criteria. So this is not something unusual. In this context, it may be worthwhile to recapitulate the past experiences. The NFC was constituted for the first time under the Constitution in 1973 to govern the federal-provincial financial relations. The first award was made in 1975, which in the financial history of Pakistan was unique primarily because of two reasons: (i) firstly it was done by a democratically elected government based on consensus and full support of the provinces. Secondly it was done in pursuance of a constitutional requirement to keep both the federal and provincial governments satisfied. Credit must be given to the then government which was able to handle this important issue of friction successfully, satisfying all the provinces.

It may be worthwhile to highlight the points of friction. Punjab had been insisting on use of population as the sole critarion for allocation of resources. This was a complete volte face on the part of this province which had been, until the separation of East Pakistan, an opponent of population using as the only criterion for allocation. Sindh wants to use total revenue collection and contribution to the national exchequer as the criteria for allocation. Its claim is that in 1980 its contribution to national exchequer was 80 per cent; in 1990 it came down to 75 per cent; and currently it is around 70 per cent. The province of Baluchistan wants that the criteria of geographical size of the province and the incidence of poverty should be used in making the award. NWFP wants that generation of hydro electricity should also be used as a criteria. All these criteria have merits and one should not be given priority over others. They can be reconciled. In the interest of federalism, all these criteria should be blended, so judiciously, as to satisfy each province by giving due weightage to each criteria.

The second and third awards were due in 1980 and 1985 as per the constitutional requirement. During the period 1977 to 1988 such an important constitutional requirement was ignored by the military regime. No award was made during this period. The federal-provincial financial relation was left to the whims of “dictatorial ad hocism”. As a result, not only the autonomy of the provinces was eroded but the provinces became totally subservient to the federal government in financial matters and their own financial viability was marginalised.

In April 1991 it again goes to the credit of a democratically elected government to announce the second NFC award after a lapse of about 16 years although its ground works were undertaken by the previous democratic government. Under this award, the divisible pool of resources was expanded to include excise duties on tobaco, tobacco products and sugar, in addition to tax on income, corporate and sales tax and export duty on cotton. The provincial governments received 80 per cent of the net proceeds (after deducting administrative cost) of these taxes. The provinces were also made eligible for any profits from resources-based operations located within their boundaries including profits earned by the WAPDA from hydroelectric generation, the natural gas development charges collected by the government from gas companies and oil royalties. The provincial shares were determined as: Punjab 58 per cent, Sindh 23 per cent, NWFP 14 per cent and Baluchistan 5 per cent.

The third award was made by the caretaker government of Mr. Meraj Khalid. During its three-month’s stint, this caretaker government did not have the mandate to handle such a vital issue but curiously enough, despite protests from provinces, it went ahead. Why it was necessary for this government to go through with the NFC award with indecent haste just three days prior to election? Could that government not wait for a few weeks so that elected representatives of the people could decide this vital issue. There is a general perception in the country, particularly in three provinces, that this award was rushed through to oblige a particular province as the then President, the caretaker PM and the imported finance minister all came from that province. After the 1997 elections, the award should have been ratified by the National Assembly and the four provincial assemblies. Three provincial assemblies did not ratify it. So this award became a major focus of friction which even today continues unabated. The PML government must be credited for holding the population census under the supervision of the Army. One does not know why the PML government did not review the caretakers’ award in the light of census results. The general complaint of the three smaller provinces is that the caretakers’ award had no legal backing as it was mala fide and not approved by the provincial and national assemblies. It did not adequately protect the financial interests of the three smaller provinces, particularly of the province of Sindh.

Small provinces are asking for the application of “quid pro quo”, a fundamental parameter of public finance. The principles of federalism are based on the willingness of the federating units which join the federation to get certain benefits. The reverse is not true because it would then become centralism or unitary form of government. USA started with a few states. It took more than 200 years to have 53 states which joined the US federation for obvious benefits. In the beginning the federating units collected income tax, custom duties, etc. and contributed to the federal budget according to mutually agreed formula. However this responsibility was passed on to the federal government because of considerations of the economy and efficiency. By becoming part of a federation the economic and financial interests of a province should not be seriously jeopardized. Its financial viability must not be marginalised.

In the first decade of Pakistan’s existence, provincial governments met 70 to 90 per cent of their respective expenditures from their own sources.. Federal grants or subventions were minimal. Over the years, the provincial governments’ financial sources were reduced instead of being widened. The reasons are understandable but regrettable. General Musharraf in his famous speech when he took over the mantle of power categorically stated that he would remove the frictions of interprovincial disharmony. This gave a message of hope and satisfaction to the people, particularly in the smaller provinces. People looked forward that the anomalies of the NFC award given by the caretaker government would be rectified. Even the PML government continues to ignore the anomalies with a “psychology of an ostrich”.

The province of Sindh in general and Pakistan’s mega city, Karachi in particular has been a victim of deliberate policy of neglect, interference, and discrimination against all democratic norms. Since 1977, there has been a reverse flow of resources from Karachi. This is amply proved by the fact that the province of Sindh contributed 75 percent to the federal revenues in 1990. The major contributory factor for this decline since 1980 has been the discriminatory fiscal policy. The PP government made some good efforts to arrest the decline in its short stint of three years (1993-96) by making special allocations for infrastructure in Karachi but this was not enough. Now with the restoration of democracy, the present government must remove “inter provincial disharmony”. The following major financial measures must be undertaken on urgent basis.

(i) A new NFC must be reconstituted and the present award must be annulled

(ii) Population must also be used as a criterion for making contribution to the divisible pool. (iii) Sale tax be restored back to the provinces as originally envisaged in our Constitution. (iv) The federal government should restore back tax collecting responsibility to the provinces for all those items which belong to the provinces.

(v) Each provincial government should be required to pay and maintain the federally undertaken projects already existing within its geographical area.

(vi) One province must not subsidize other province in the name of a so-called federal project.

(vii) Population must also be one of the criteria for determining provincial shares in the divisible pool. In conclusion, the above seven measures are necessary to remove the disharmony and the deprivation of the smaller provinces. They will also help in evolving an optimal relationship between the federal and provincial governments. In a truly democratic set-up justice and fair play provide the overriding consideration for any decision making. It is high time that General Musharraf and PM Jamali must ensure that the new NCF award is arrived at with full participation and agreement of the federating units whose financial position needs to be optimised and not marginalised.