DEVELOPMENT ADVOCATE

PAKISTAN 2, Issue 2 Volume

June 2015

thNational Finance 7 Commission Award DEVELOPMENT ADVOCATE PAKISTAN © The Express Tribune June 2015 CONTENTS

Analysis Interviews

Dr. Ayesha Ghaus Pasha The NFC Awards: Past, Present and the Future 02 28 Provincial nominee for NFC - Punjab 28 Chaudhry Abdul Majid Opinion Prime Minister - Azad Jammu and Kashmir Dr. Hafeez Ahmed Pasha 7th NFC Award: Has it worked? Distinguished Economist and Chairman, 16 Dr. Ashfaque H. Khan 29 Panel of Economists (Independent advisory committee for the government) Provincial Finance Commission Awards: 21 A tool for inclusive development Dr. Jehanzeb Jamaldini Muhammad Sabir 30 Senator - Balochistan 7th NFC-Constitutional and Legal importance Muzaffar Said Development Advocate Pakistan provides a platform 23 Nasir Jamal 31 Finance Minister - Khyber Pakhtunkhwa for the exchange of ideas on key development issues DEVELOPMENT ADVOCATE and challenges in Pakistan. Focusing on a speci.c 7th NFC Award: Is there any impact? development theme in each edition, this quarterly Mir Khalid Langove 25 Naseer Memon publication fosters public discourse and presents 31 Advisor to Chief Minister on Finance varying perspectives from civil society, academia, Balochistan government and development partners. The PAKISTAN The Perspective of Development Partners on publication makes an explicit effort to include the 26 the 7th NFC and the Way Forward Ch. Muhammad Berjees Tahir voices of women and youth in the ongoing discourse. Faisal Rashid A combination of analysis and public opinion articles Disclaimer 32 Federal Minister - Kashmir affairs and Gilgit Baltistan promote and inform debate on development ideas The views expressed here by external contributors or the members of whilepresentingup-to-dateinformation. the editorial board do not necessarily re0ect those of the organization Akhunzada Chitan for which they work, and none of the opinions contained herein are YouthVoices 32 Central leader of FATA joint political UNDP’s official views. parties and member of FATA reforms committee Editorial Board Editor External Reviewer Youth voices from Balochistan Sikandar Khan Sherpao Mr. Marc-André Franche Maheen Hassan Dr. Abid Qaiyum Suleri 38 UNDP Country Director Provincial President and parliamentary leader of Qaumi Executive Director 33 Watan Party, Khyber Pakhtunkhwa Assembly Designer Sustainable Development Policy Mr. Aadil Mansoor Institute (SDPI) Youth Voices from Sindh Assistant Country Director/Chief Syed Asfar Hussain Shah 39 Saleem Mandviwalla Crisis Prevention and Recovery Unit 34 Provincial nominee for NFC - Sindh Layout Mr. Amir Goraya Torsum Khan 40 Youth Voices from Punjab Assistant Country Director Prof. M Ibrahim Khan Democratic Governance Unit Printed by: Agha Jee printers, Islamabad 35 Provincial nominee for NFC - Khyber Pakhtunkhwa Mr. Shakeel Ahmad 41 Youth Voices from Azad Jammu and Kashmir Assistant Country Director/Chief Mian Mehmood-ur-Rasheed Development Policy Unit United Nations Development Programme Pakistan 36 Leader of opposition - Punjab 4th Floor, Serena Business Complex, Youth Voices from Gilgit Baltistan Mr. James Littleton Khayaban-e-Suharwardy, Sector G-5/1, 42 Chief Technical Advisor P. O. Box 1051, Sakib Sherani Strengthening Electoral and Legislative Processes Islamabad, Pakistan 37 Senior Economic Advisor

Ms. Fatimah Inayet /undppakistan /DevelopmentAdvocatePakistan Communications Analyst For contributions and feedback, please write to us at: www.twitter.com/undp_pakistan [email protected] Saleem Mandviwalla www www.pk.undp.orgProvincial nominee for NFC - Sindh

ISBN: 978-969-8736-11-8 us Follow Editorial

n 2015, the 7th National Finance Commission Award (NFCA) will Provincial Finance Commission Awards (PFCA). The share of local conclude its .ve year term. Deliberations on the8th NFCA have governments is very low – around 24 percent for Punjab, 6 percent Ialready begun. As we transition to the new NFCA, it is important for Sindh and 4.6 percent for KP. The lack of elected local to take stock of the achievements and failures of the current award, governments for almost 10 years, has virtually stopped the and its impact on the future of development policy and Pakistan's processofdecentralization. effortstoachievetheSustainableDevelopmentGoals. Moving forward, the 8th NFCA must build on the foundation laid The 7th NFCA was unprecedented in the history of Pakistan. First, it down by the 7th NFCA and encourage provinces to establish well- generated an unparalleled political consensus on the NFC process. functioning PFCAs. The multiple indicator formula for horizontal The political process which underpinned it was participatory and distribution of resources must be retained, with poverty/ inclusive, with a broad buy-in characteristic of a truly democratic backwardness remaining a key criterion. Indeed, the NFC process development process. Second, it introduced much needed should consider integrating regular reporting of the Multi- structural changes to how funding was distributed between dimensional Poverty Index and Human Development Index provinces. For the .rst time, the criterion for distribution was not developed by the Government of Pakistan with support from based on population alone but on multiple indicators including UNDP.This will not only provide a measure to assess the impact of poverty. increased expenditure locally but will also establish baselines for subsequentFCAs. Resource distribution is widely used as an instrument of .scal equalization to address socio-economic inequalities. For example, Recognizing that this may need constitutional amendment, the the Indian Finance Commission (FC) has been constituted 14 times NFC process should also integrate the three administrative since independence, compared to four conclusive NFCAs in regions – Azad Jammu and Kashmir, Gilgit-Baltistan and the Pakistan. The regularity of awards by the Indian FC is largely thanks Federally Administered Tribal Areas (FATA) – but not at the cost of to being delinked from population. In the spirit of .scal equalization, provincial shares. Given the special needs ofTemporary Displaced the FC awards assign signi.cant weighting to deprivation or People, FATA particularly needs urgent attention. The “backwardness” measured through poverty, geographical continuation of the NFC process will strengthen Pakistan and remoteness, per capita income, etc. Other countries, such as enhance the functioning of the many layers of government Germany and Canada, also use multiple criteria successfully. The whose productive participation is crucial for development and introduction of multiple criteria in Pakistan's 7th NFCA was thus inclusivegrowth. welcome.

Some critics believe the use of the 'backwardness' or poverty indicator for the NFCA creates perverse incentives for provinces – to increase their share, provinces will want to remain poor or at least appear poor – and propose replacing it with 'poverty reduction'. However, we believe the issue is not the criterion used, but the need to develop a proper monitoring and evaluation system to assess the localimpactsofdevelopmentexpenditure.

The 7th NFCA was expected to increase federal transfers by 24 percent from the base year of 2009–10.While actual federal transfers increased by 22 percent, due to revenue shortfall provincial development expenditure increased by only 13.6 percent against a 37 percent projection. The provincial current expenditure, on the other hand, increased by 16.4 percent against a projected 14 percent. This suggests that increased funds did not proportionally convert into development expenditure. Even poverty reduction expenditures as a percentage of GDP have remained unchanged at 7.6 percent. While it is encouraging that education and health are top priorities at both provincial and federal levels, other sectors (including environment, agriculture, and climate change) are now muchlowerprioritiesfortheprovincesinthepost7thNFCAera.

The impact of the 7th NFC has also been weak. For example, Punjab has shown only a marginal increase in the proportion of primary Pakistan Gold Coins school aged children enrolled in an appropriate level of education, the Net Primary Enrolment (NPE), from 62 percent in 2008–09 to 64 Pakistan only issued its own coins for the .rst time in 1976, percent in 2013–14, whilst Khyber-Pakhtunkhwa (KP) has risen from and its gold coins are commemorative pieces. 52 percent to 54 percent. In Sindh and Balochistan the NPE has actually declined, from 54 percent to 48 percent and 44 percent to 39 percent respectively. These insigni.cant changes point towards a critical issue: increased resources are simply not converting into enhancedsocialsectoroutcomes.

Reasons for this include weak public administration capacity to spend adequately and, importantly, the dormant status of the

01 Analysis

and increasing annually in line with the octroiandzillataxfor1998-99. remained the single factor of population growth in the pool. An amount equal to until 2010. There were slight variations in The NFC Awards: 1/6th of general sales tax (GST) was The vertical distribution and the shares whenever the population distributed among provinces; 50 percent composition of the divisible pool have distributionalteredduetocensus. on the basis of population and 50 percent been changing with every award, but the Past, Present and the Future in proportion to the collection of audited criteria for horizontal distribution Chart 1: Salient Features of Various NFCs

Vertical Horizontal Grants and Straight Award Year Divisible Pool Distribution Distribution Criteria Aid Criteria Transfers ntergovernmental transfers are Overview of NFC Awards Provincial Share necessary to ensure that sufficient Ÿ TaxesonIncome Number Name Status 80percent Ÿ KP100million resources exist at each level of Ÿ Taxes on Goods sales and I Population Ÿ Balochistan 1974 government to .nance its service Purchase First NFC Award 1974 Conclusive Federal Share 20 50million responsibilities. In Pakistan, the federal Ÿ ExportDutiesonCotton percent government spends almost 68 percent Second NFC Award 1979 Inconclusive and its revenue generation is almost 90 Third NFC Award 1985 Inconclusive Ÿ percent.The provincial governments incur Punjab one billion for 3 Ÿ Share in total the remaining 32 percent of expenditure Fourth NFC Award 1991 Conclusive years Crude oil but their share in revenue generation is Fifth NFC Award 1995 Inconclusive Provincial Share Ÿ Sindh 700 royalties on the Ÿ Similaras1975+ only 10 percent.There exists a clear vertical 80percent million for .ve basis of a share Sixth Conclusive Ÿ FED on Tobacco and imbalance which the National Finance NFC Award 1997 Population years in crude oil 1990 tobacco manufactures Commissions (NFCs) aim to reduce. They Federal Share 20 Ÿ KP 200 million production Presidential Order Distribution Order 2006 - andsugar also seek to reduce the horizontal percent forthreeyears imbalance between the provinces. These Seventh NFC Award 2010 Conclusive Ÿ Balochistan 100 Ÿ Share in Natural transfers help reduce intergovernmental million for three Gassurcharges Source: Dr. Kaisar Bengali, 'A step towards .scal autonomy', differences in service delivery. Just as the Development Advocate Pakistan, Volume 2, Issue 1 years provinces have more subjects than they can raise revenue for from within their jurisdiction, the subjects devolved to the 50 percent of which went to theprovinces . The1973constitution Ÿ KP 3.31 billion district governments also have After independence, the same formula In 1974, the .rst NFC was constituted for.veyears Ÿ Ÿ expenditure requirements far in excess of was continued with some annual grants under the 1973 constitution. Chart 1 TaxesonIncome Ÿ Balochistan Share in total Ÿ their own resources.The provincial .nance forKhyber Pakhtunkh wa and Sindh. In presents the salient features of the various WealthTax 4.08 billion for Crude oil Ÿ CapitalValueTax royalties on the commissions (PFCs) have been set up to 1952, the newRaisman Award was NFC awards after 1973 and Table 1 gives Provincial Share .veyears Ÿ Taxes on Sale and Ÿ Additional basis of a share deal with these imbalances, though their implemented, giving the federal the distribution between the provinces. 37.5percent government 50 percent ad hoc share of 1996 Purchase Population granttoeach in crude oil functioning remains dormant. These The divisible pool consisted of export duty Ÿ sales tax to deal with the .nancial crisis ExportDutiesonCotton Federal Share province on production issues have gained prominence in the on cotton andtaxes on sales and income . Ÿ arising from the partition. The remainder CustomDuties 62.5percent achieving a context of democratic continuity since The provincial share was .xed at 80 Ÿ FEDexcludingFEDonGas Ÿ Share in Natural was distributed between East Bengal (45 growth of 14.2 2008. The continuation of this process will percent and population was the basis for Ÿ Anyothertax Gassurcharges percent) and Punjab, Sindh, NWFP and percent in not only strengthen the federation but horizontal distribution. In 1990, the pool provincial Balochistan(55percent). also allow different levels of government was enlarged by including excise duty on receipts to function independently. The setting up tobacco and tobacco manufacturers and of the 8th NFC under Article 160 (1) of the In 1955, Punjab, Sindh, NWFP and sugar. In addition, the net proceeds of Constitution on April 24, 2015 should be Balochistan were declared one province development surcharge on natural gas 27.750BillionC viewedinthiscontext. called West Pakistan and East Bengal and royalty on crude oil were made as Similaras1997NFC Provincial Share Grant will increase became East Pakistan. This arrangement straight transfers to theprovinces . Net 2006* and Sales Tax on Services (CE 41.5- 46.25 Population each year at same b ThePast continued till 1970. During this period, two pro.ts from hydro-electric stations were to mode) percent rate as growth in awards were announced in 1961 and 1964. The NFCs 1974, 1990, 1995 and 2006 be paid by WAPDA under theguarantee of divisiblepool Under the 1961 Award, the share of East made their recommendations, while the the federal government. In 1996, all FBR Pakistan was 54 percent and that of West NFCs constituted in 1980, 1985 and 2000 taxes except excise duty on natural gas Ÿ Ÿ Share in total Pakistan was 46 percent in the divisible Population failed to do so .The 7th NFC which was set and income tax paid out of the Federal Ÿ Poverty Crude oil pool. The divisible pool consisted of 70 up on 21st July 2005 and reconstituted on Consolidated Fund were included in the and royalties on the percent of sales tax and other taxes. The pool. The provincial share was .xed at 37.5 Backwardn basis of a share 24th July, 2009, made path-breaking Provincial Share remaining 30 percent of sales taxes was percent. There was no other change in the ess in crude oil recommendations announced in 2010. 56 percent 2010- 0.66 percent in the distributedbetweentheprovincesonthe formulaforhorizontaldistribution. Ÿ Revenue production Theimplementation of this Award was Similaras1997NFC d 11 and 57.5 share of each basis of their contribution. The 1964 NFC 2009 collection monitored as perArticle 160 (3B) inserted percent in 2011- province in divisible was madeunder Article 144 of the 1962 The 6th NFC could not .nalize the award and Ÿ Share in Natural underthe18thAmendment.⁴ 12onward pool Constitution. The divisible pool consisted due to divergent views on the basic issues. Generation Gas surcharges of income tax, 70 percent of sales tax, The intergovernmental revenue sharing Ÿ Inverse on the bases of Independence and the aftermath excise duty and export duty. The East was executed through a presidential order, population average rate Before and during the time of Pakistan-West Pakistan shares and 'Distribution of Revenues and Grants-in- density perMMBUT independence in 1947, intergovernmental distribution of 30 percent of the sales tax Aid Order 2006'. The provincial share was transfers were governed by the remained unchanged. In 1970, West increased from 37.5 percent to 41.5 in *DistributionofRevenuesandGrants-in-AidOrder2006 Government of India Act, 1935 under the Pakistan was divided again into four 2006-07 and to 46.25 by 2010-11. All a: Rs500millioneachtoPunjabandSindhandRs100millioneachtoKPandBalochistan. Niemeyer Award. Sales tax on goods and b: 2006-0741.5percent,2007-0842.50percent,2008-0943.75percent,2009-1045.00percentand46.25percent.. provinces and West Pakistan's share was provinces were made eligible for Grants- services was a provincial subject. The c: Theshareofeachprovinceingrantsisasfollows:Punjab11.0percent,Sindh21.0percent,KP35percentandBalochistan33percent. distributed among provinces on the basis in-Aid, .xed at Rs. 27.75 billion for 2006-07 d: Salestaxonservicesgiventoprovinces. divisible pool consisted of income tax only, ofpopulation. Source:VariousPresidentialorders,MinistryofFinance,Pakistan 02 03 ThePresent-7thNFCAward Table 1: Horizontal Distribution of Federal Transfers (%) Pre and post 7th NFC revenue and thatofKPwasgreaterthanSindh. amendment. The overall tax-to-GDP ratio The 7th NFC award, for the .rst time, used of Pakistan is 11.8 percent which is 3.2 Punjab expenditureanalysis multiple indicators for horizontal distribution. NFC Award Sindh KP Balochistan In the four years analyzed in Table 4, the percent below the projected level of 15 As indicated in Table 1, the share of Punjab in 1974 60.25 22.50 13.39 3.86 average annual growth rate of total percent. The 7th NFC created a As a result of the change in vertical federal transfers declined from 57.36 percent revenues was 14.9 percent, which is higher disincentive for the federal government to 1982 57.57 23.34 13.39 5.30 distribution, a net amount of Rs. 1,236 to 51.74 percent whereas the share of all other compared to the growth in 2009-10, but mobilize additional resources, as 57 paisas billion was added to the provincial kitty in provinces increased. Balochistan gained the 1990 57.97 23.34 13.39 5.30 the growth in tax revenues was lower in (pennies) out of each extra rupee .ve years. The application of multiple maximum, as the formula gave weightage to 57.88 23.28 13.54 5.30 the same period. The provincial tax mobilized by the federal government 1996 criteria to this net amount shows that areaandbackwardness. revenues have shown a growth of 36.5 goes to the provinces. A more important 2006* 57.36 23.71 13.82 5.11 Punjab, Sindh, KP and Balochistan percent in the last four years vis-a-vis the reason, however, is the slow growth of the received, respectively, Rs. 319 billion, Rs. Under the 7th NFC Award, which completes its 2009 51.74 24.55 14.62 9.09 growth of 13.8 percent in the federal tax economy. 290 billion, Rs. 307 billion and Rs. 320 .ve years in the .scal year 2014-15, the *Distribution of Revenues and Grants-in-Aid Order 2006. revenue. It is mainly explained by the billion.The net addition to the resources of provincial share in the divisible pool of taxes Source: Various Presidential orders, Ministry of Finance, Government of Pakistan devolution of the GST on Services to the Balochistan was greater than Punjab and increased from 47.5 percent to 56 percent in provinces under the 7th NFC and the 18th the .rst year (2010-11) and 57.5 percent Table 2: Vertical Implications of the 7th NFC Award on Divisible Pool Transfers (%) subsequently. The collection charge by the Factors FBR Tax Divisible Federal Provincial federal government was reduced to one Revenue Pool Share Share percent of the total collection from .ve 2010-11 RE 1,568 1,463 628 835 Table 4: Pre and Post 7thNFC Revenue Analysis (Rs billion) percent. One percent of the divisible pool was 2011-12 RE

ward 1,937 1,835 772 1,063 allotted to KP for war on terror. Balochistan Growth Growth 2012-13 RE 1,989 1,929 795 1,134 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 B 2009-10* 2010-11-2013-14** was guaranteed allocations as projected in the As per 2013-14 RE award. The sales tax on services was 2,262 2,207 929 1,278 (%) (%)

7th NFC A recognizedasaprovincialtax. 2014-15 RE 2,795 2,729 1,148 1,581 Total Revenue (A+B) 2,097 2,271 2,579 2,997 3,651 4,382 13.3 14.9 2010-11 RE 1,568 1,459 784 675 2011-12 RE 1,937 1,821 979 842 A. Tax Revenue 1,473 1,699 2,053 2,199 2,565 3,424 22.3 14.9 2012-13 RE 1,989 1,917 1,030 887 As per 2013-14 RE 2,262 2,189 1,177 1,013 Federal 1,418 1,635 1,946 2,049 2,375 3,129 22.4 13.8

Order 2006 Order

Distribution 2014-15 RE 2,795 2,697 1,450 1,248 (i) Provincial 55 65 107 151 190 295 18.9 36.5 2010-11 RE 0 4 -156 160 2011-12 RE 0 14 -207 221 B. Nontax Revenue 624 572 527 798 1,087 958 -3.4 14.9 2012-13 RE 0 12 -235 248 Federal 557 510 479 727 1,038 816 -1.1 16.9

Impact of 2013-14 RE 0 18 -248 266 (ii).Provincial 68 62 48 71 49 142 -19.0 -7.6 change in Design 2014-15 RE 0 32 -302 333 2010-11 RE 0 0.3 -19.9 23.7 (iii)Federal Transfers 634 999 1,090 1,215 1,406 1,720 20.5 22.1 2011-12 RE 0 0.8 21.1 26.2 to Provinces 2012-13 RE 0 0.6 -22.8 27.9 (%) (iv)Federal Loans and Impact of 2013-14 RE 0 0.8 -21.1 26.3 120 85 89 107 122 20.8 26.3 0.4 grants to Provinces

change in Design 2014-15 RE 0 1.2 -20.8 26.7 Provincial total Source: Policy paper No. 25, Social Policy and Development Centre 876 1,211 1,334 1,544 1,767 897 16.7 19.2 revenue (i+ii+iii+iv) Table 3: Horizontal Implications of the 7th NFC Award on Memo Item Divisible Pool Transfers (Rs. in Billion

Factors Punjab Sindh KP Balochistan Tax - to- GDP Ratio 10.0 9.4 9.9 9.6 10.1 11.8

2010-11 RE 420 199 133 83

er 7 Federal 9.7 9.1 9.4 8.9 9.3 10.8 ool 2011-12 RE 541 257 171 95

ward 2012-13 RE 568 270 180 116 Provincial 0.4 0.4 0.5 0.7 0.7 1.0 2013-14 RE 650 308 206 123

th NFC A Divisible P Non tax to GDP Ratio 4.3 3.2 2.6 3.5 4.3 3.3

Transfers as p Transfers 2014-15 RE 804 381 254 141 2010-11 RE 380 170 90 35 Federal 3.8 2.8 2.3 3.2 4.1 2.8

ool 2011-12 RE 482 201 116 43 Provincial 0.5 0.3 0.2 0.3 0.2 0.5 2012-13 RE 507 212 122 45 2013-14 RE 579 242 139 Overall Revenue 14.3 12.6 12.5 13.1 14.4 15.1 Order 2006 Order 52

Distribution

Divisible P Transfers as per Transfers 2014-15 RE 714 299 171 64 Tax- To- GDP Ratio 10.70 11.75 12.80 13.60 14.30 15.00 2010-11 RE 39 29 44 48 Projections *** 2011-12 RE 58 55 55 52 2012-13 RE 61 57 58 71 Federal 10.20 11.10 12.00 12.70 13.30 13.85

Impact of 2013-14 RE 71 66 67 72 Provincial 0.50 0.65 0.80 0.90 1.00 1.15

change in Design 2014-15 RE 90 83 83 77 2010-11 RE 10.3 16.9 48.6 139.9 *onthebasisof2008-09 Note: Major analysis has been conducted by UNDP Consultants. Dr. **2014-15Bnotincludedtoavoiddistortedcomparison 2011-12 RE 12.1 27.4 47.6 120.5 Pervez Tahir (Freelance Political Economist based in Islamabad) and ***Projectionsatthetimeof7thNFCaward 2012-13 RE Mr. Wasim Saleem (PhD candidate at Pakistan Institute of (%) 12.0 27.1 47.6 156.8 Source:MinistryofFinance,FiscalOperations,July-March2015;ReportoftheNationalFinanceCommission,2009

DevelopmentEconomics,Islamabad). Impact of 2013-14 RE 12.2 27.2 47.9 138.2

change in Design 2014-15 RE 12.6 27.6 48.5 121.4 04 Source: Policy paper No. 25, Social Policy and Development Centre 05 Table 5: Pre and Post 7th NFC* Expenditure Analysis

Growth Growth 2014-15 2010-11 to Year 2009-10 2010-11 2011-12 2012-13 2013-14 2009-10* The 7th NFC Award: Salient Features B 2013-14** (%) (%)

Total Expenditure 3,178 3,518 3,968 4,923 5,377 6,262 22 14

The Federal Expenditure 2,273 2,442 2,612 3,441 3,759 4,302 23 13 horizontal distribution of the Current 1,841 2,142 2,209 2,625 2,885 3,463 20 12 resource among the provinces Development 432 300 403 816 874 839 40 19 was based on multiple factors The provinces' collective instead of population (though it was Provincial Expenditure 905 1,077 1,356 1,482 1,618 1,960 18 16 share from the divisible tax still assigned a heavy weight in the pool was raised from 48.75 formula) alone: population (82 Current 646 831 981 1,110 1,187 1,521 15 16 percent to 56 percent in the percent), poverty/backwardness .rst year of the award and 57.5 (10.3 percent), revenue Development 258 246 375 372 431 439 28 14 percent during the rest of its collection/generation (5 Memo Item .ve year life. percent) and area (2.7 percent). Federal Expenditure as % 71.5 69.4 65.8 69.9 69.9 68.7 of Total Expenditure The formula for Gas Federal Current 12.6 11.9 10.7 11.5 11.4 11.9 Development Surcharge Expenditure as % of GDP The federal government's Khyber Pakhtunkhwa was (GDS) computation was revised Provincial Current collection charges were given arrears on the payment and its net proceeds distributed 4.4 4.6 4.8 4.9 4.7 5.2 reduced from 5.2 percent to 1 of hydel pro.ts and among the (gas producing) Expenditure as % of GDP percent. Balochistan was given arrears provinces, and the rate of excise Federal Development of GDS. duty on gas was increased from 3.0 1.7 2.0 3.6 3.4 2.9 Rupees 5.09mmbtu to Rupees Expenditure as % of GDP 10mmbtu. Provincial Development 1.8 1.4 1.8 1.6 1.7 1.5 Expenditure as % of GDP

In view Recognizing the Total Expenditures as % of 21.7 19.5 19.2 21.5 21.2 21.5 of the special role of Khyber GDP needs of Balochistan, the Pakhtunkhwa as a frontline in the award gave it a minimum of Rupees war on terror, the province was *onthebasisof2008-09 83 billion (9.09 percent of the given an additional resource of 1 **2014-15Bnotincludedtoavoiddistortedcomparison Discretionary grants-in-aid percent of the net proceeds of Source:MinistryofFinance,FiscalOperations,July-March2015;ReportoftheNationalFinanceCommission,2009;ProvincialAnnualBudgetStatements provincial share in the divisible pool) were abolished. over the life of the award. In case the the divisible pool to enlarge the estimated share of the province was size of divisible pool before its The 7th NFC along with the 18th amendment less than the minimum amount vertical distribution over Table 6: Pre and Post NFC Utilization Rates of devolved 17 ministries to the provinces. Now pledged, the shortfall was to be met the award's life. Provincial Development Expenditures* almost all of health, education, water supply, by the federal government environment, law and order, etc. are Revised Utilization from its resources. Budget The provincial subjects. More revenue with more (Rs in Rate** (Rs in Billion) provincial responsibilities should indicate more Billion) (%) general sales tax (GST) on expenditures at the provincial level. Table 5 services was transferred to the presents the pre and post NFC expenditures. 2008-09 306.6 314.5 102.6 Sindh got a grant of 0.66 provinces (perhaps the biggest gain The share of the federal government in 2009-10 357.6 315.9 88.3 percent of the provincial share for the provinces apart from the expenditure has decreased by almost three to offset its losses owing to the increase in their collective share percentage points in the last 6 years. In 2009, 2010-11 442.6 322.0 72.7 merger of one-sixth of GST in from the divisible pool), and they the share was 71.5 percent whereas in 2014- the divisible pool. were given a choice to either collect 15 it is 68.7.The provincial expenditures grew 2011-12 497.6 439.8 88.4 the levy themselves or allow the during 2010-11 to 2013-14 at an average of federal government to collect 15 percent per annum whereas federal 2012-13 614.5 433.6 70.6 it on their behalf. expenditures grew at 13 percent per annum. The growth of development expenditures at 2013-14 681.8 518.0 76.0 the federal level is higher as compared to the 2014-15 750.9 provincial level. Total expenditure growth was less in the NFC period as compared to Average Dev. Exp 2008-09 to 332.1 315.2 94.9 2009 -10. The overall expenditure to GDP 2009-10 ratio was 21.53 percent. In the post NFC period, the higher growth in current Average Dev. Exp 2010-11 to By Nasir Jamal, Journalist and Chief Reporter, DAWN Newspaper 559.1 428.3 76.6 expenditures as compared to development 2013-14 expendituresattheprovinciallevelindicates *Includesbothrevenueandcapitalaccountexpenditures **Revisedexpendituresas%ofbudgetedallocations 06 Source:ProvincialWhitePapers 07 that a large portion of additional revenues percent, which is 18 percent less than the increased from 5.7 percent of GDP in 2009- Impactonpriorities Post NFC, the expenditures on health improvement. The expenditures have not went to current expenditures as opposed to pre NFC period. The utilization rate in the 10 to 6.5 percent in 2014-15. The major Chart 5 presents the pre and post 7th NFC increased and it stands second in the changed for three services. At the development expenditures. In per capita post NFC period as compared to pre NFC reason is the revenue shortfall at the federal federal and provincial priorities in basic priority list compared to 5th during pre provincial level, expenditures have terms as well, the revenue expenditure period for Punjab fell by 22.3 per cent, for level. The .scal de.cit at the federal level services. The share of education NFC. There are four social services out of 13 increased only for two services in the last doubled(SeeTable13). Sindh by 22.8 percent and for Balochistan has increased from 4.8 percent in 2009-10 expenditures is highest among all social at the federal level, for which the four years, declined for .ve and remained by 16.2 per cent. Only in the case of KP, the to 7.1 percent in 2014-15. Interestingly, the services for federal as well as provincial expenditures have decreased post the NFC unchangedforsix. Table 6 shows the year wise utilization rate of utilization increased marginally by 0.5 provinces show a budget surplus which governments. and six services for which there is an development expenditure in pre and post percent(SeeTable14). helps in reducing the overall .scal de.cit. 7th NFC periods for the provinces as a whole. The budget surpluses at the provincial level Chart 5: Pre and Post 7th NFC Federal and Provincial Expenditure Ranking* for Basic Services The result shows that during 2008-09 to Theexpenditurerevenue gap indicate that the 7th NFC has increased the 2009-10, the average utilization rate was Table 7 presents the expenditure revenue provincial revenue but the provinces have Description Federal Priorities Provincial Priorities Overall Priorities almost 95 percent whereas in the post NFC gap in pre and post NFC periods.The results failed to use those additional revenues for period, the utilization rate was only 77 reveal that the overall .scal de.cit has thewelfareofitspeople. Post Pre NFC Pre NFC Post NFC Pre NFC Post NFC NFC Table 7 : Pre and Post 7th NFC Fiscal Deficits Roads, Highways, & 354 5 4 5 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 B Bridges Federal Expenditure as % of GDP 14.09 15.50 13.52 12.65 15.02 14.80 14.79 Environment/Water 11 7 6 7 6 7 Supply & Sanitation Provincial Expenditure as % of GDP 5.85 6.17 5.96 6.57 6.47 6.37 6.74 Education 2 1 1 1 1 1

Federal Net Revenue as % of GDP* 9.3 9.1 6.3 6.5 6.8 7.9 7.7 Health 4 3 5 3 5 3

Provincial Revenue as % of GDP 5.0 5.2 6.2 6.0 6.3 6.5 7.4 Population Planning 7 11 11 11 11 11

Memo item: Deficit as % of GDP Social Security & 998 9 8 9 Federal -4.8 -6.4 -7.2 -6.2 -8.2 -6.9 -7.1 Welfare Natural Calamities Provincial -0.8 -1.0 0.3 -0.5 -0.2 0.1 0.7 869 6 9 6 & Other Disasters Overall -5.7 -7.4 -6.9 -6.7 -8.4 -6.8 -6.5 Agriculture 5 4 3 4 3 4 *Grossrevenueminusprovincialtransfers Source:MinistryofFinance,FiscalOperations,July-March2015;ReportoftheNationalFinanceCommission,2009;ProvincialAnnualBudgetStatements. Land Reclamation 12 12 12 12 12 12

Rural Development 10 8 7 8 7 8 Expenditureonpovertyreduction One of the primary tasks of each government is to provide basic services to the general public and reduce poverty. Chart 3 presents the share Law and Order 1 2 2 2 2 2 of federal and provincial governments in poverty reduction expenditures and the total as a percentage of GDP.In 2009-10, the ratio between federal and provincial governments was 42:58. In 2014-15 it stands at 27:73. This because the18th amendment devolved the provision of Low Cost Housing 13 13 13 13 13 13 socialservicestotheprovinces. However, as the overall poverty reduction expenditures as a percentage of the GDP remain nearly unchanged, the impact of the NFC and Justice Administration 6 10 10 10 10 10 devolutionhasbeentoshifttheexpendituretotheprovinces(Chart4). *Ranking on the basis of expenditures in 2009-10 and aggregate expenditures during 2010-11 to 2013-14.The numbers shows the expenditure share of a particular service in total expenditures,bothcurrentanddevelopment.Redindicatesdecline,greenshowsimprovementandwhiteshowsnochange. Chart 3: % Share of Federal and Provincial Governments in Poverty Source:MinistryofFinance,PRSPSecretariat. Chart 4: Poverty Reduction Expenditures as Percentage of GDP Reduction Expenditure

Federal Provincial

73.3 10 Public Spending on Social Services (as a percentage of GDP)

66.6 9.4 64.5 8.4

61.4

57.8

55.9 Average Average 7.5 2010-11 2011-12 2012-13 2013-14 7.6 7.6 Pre-NFC Post-NFC 6.9 7.3

44.1

42.2

38.6 0.51 0.46 0.33 0.37 0.48 0.41

35.5 Federal Government

33.4 5 26.7 Provincial Government 1.99 2.07 2.40 2.58 2.56 2.40 2.5 Punjab 1.06 1.11 1.22 1.24 1.24 1.21

0 Sindh 0.49 0.55 0.52 0.64 0.62 0.58 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 B 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 B Khyber Pakhtunkhwa 0.32 0.23 0.46 0.49 0.47 0.41

Source: Ministry of Finance, PRSP Progress Reports; Federal and Provincial Source: Ministry of Finance, PRSP Progress Reports; Federal and Provincial Baloshistan 0.12 0.18 0.20 0.20 0.22 0.20 AnnualBudgetStatements AnnualBudgetStatements Total 2.50 2.53 2.73 2.95 3.04 2.81

Source: PolicypaperNo.25,SocialPolicyandDevelopmentCentre

08 09 Socialsectoroutcomes rate. Although still low, the increased Contraceptive prevalence rate improved in Public Spending on Health (as a percentage of GDP) Table 8 shows the performance of key social expenditure has not made much difference all provinces, with Balochistan showing the to the education sector. In the health highest improvement. Access to piped Average Average indicators in pre and post NFC periods. In 2010-11 2011-12 2012-13 2013-14 education, Punjab and KP show marginal sector, Punjab and KP show a slight water declined signi.cantly while Pre-NFC Post-NFC improvement in net primary enrolment rate, improvement in immunization whereas sanitationperformedrelativelybetter. Federal Government 0.14 0.13 0.05 0.05 0.14 0.09 while Sindh and Balochistan experienced Sindh and Balochistan show deterioration. signi.cant deterioration. All provinces, Infant mortality rate declined as a whole, Provincial Government 0.45 0.46 0.60 0.65 0.66 0.59 except Sindh, registered progress in literacy both for males and females, but it remains higher for females than males. Punjab 0.24 0.23 0.30 0.33 0.33 0.30 Sindh 0.12 0.13 0.15 0.19 0.18 0.16 Table 8. Social Sector Outcomes (%) Khyber Pakhtunkhwa 0.07 0.06 0.10 0.09 0.10 0.09 Indicators/ Indicators/ Pre-NFC 2008-09 Post-NFC 2013-14 Pre-NFC 2008-09 Post-NFC 2013-14 Baloshistan 0.02 0.04 0.05 0.05 0.05 0.05 Province Province Total 0.60 0.59 0.65 0.70 0.80 0.68 NET PRIMARY ENROLMENT RATE (CLASS1-5 & age 5-9) INFANT MORTALITY (PER 1,000 LIVE BIRTHS) Source: PolicypaperNo.25,SocialPolicyandDevelopmentCentre Punjab 62 64 Pakistan 75* 70 Sindh 54 48 FiscalFederalisminOtherCountries achieved by separating special category states from general Male 65* 61 Pakistan has had a chequered history of .scal federalism. It was category states on the basis of a .ve-fold criteria: (i) hilly and Khyber Pakhtunkhwa 52 54 anchored in population as the sole criteria of horizontal difficult terrain (ii) low population density or sizeable share of tribal Female 69* 65 distribution. Other countries have experimented with multiple population (iii) strategic location along borders (iv) economic and Balochistan 44 39 criteria achieving good results. As Pakistan is only beginning to infrastructural backwardness and (v) non-viable nature of state CONTRACEPTIVE PREVALENCE RATE (WOMEN AGED 15-49 enter the .eld, it is useful to learn from elsewhere. India has been .nances. Horizontal imbalances are also reduced by needs-based YEARS) LITERACY RATE (10 YEARS AND OLDER) chosen for similar initial conditions and Germany as an example of grants-in-aid. Punjab 32* 38 asuccessfulfederation. Punjab 56 61 Germany:Equalclaimtocurrentrevenue Indian.nancecommissions Like Pakistan's federal-provincial tiers, Germany has federation- Sindh 57 56 Sindh 21* 25 Like Pakistan, the Indian Finance Commission (FC) is constituted länder tiers. Articles 104a to 115 discuss the constitutional Khyber Pakhtunkhwa 23* 28 every .ve years. Unlike Pakistan, there has never been a break, with provisions for .nancial relations between the federation and Khyber Pakhtunkhwa 45 53 the14thFCappointedin2013fortheperiod2015-16to2020-21.As Länder. Article 106 recognizes that“the federation and länder have Balochistan 39 43 Balochistan 6* 13 in Pakistan, the share in the net proceeds of taxes of the Union is the an equal claim to current revenue to cover their necessary main source of the revenue of the states.The divisible pool consists expenditures”.The tax base for each tier of the government is given. FULL IMMUNISATION (12-23 MONTHS BASED ON RECALL TYPE OF TOILET – Flush of all taxes, except surcharges and cesses levied for speci.c However, federation and Länder jointly collect value added tax, AND RECORD) purposes. The Fourteenth FC has radically increased the share of personal Income tax, payroll tax and corporate income tax, which Pakistan 63 74 the states from 32 percent to 42 percent. Table 9 presents the together yield 72 percent of the total tax revenue of Germany. The Punjab 85 86 weights of different indicators used in the last two FCs for federation and lender receive 42.5 percent of income tax and 50 Urban 95 98 horizontal distribution. The regularity of awards has been made percent of corporate tax, while the value added tax is apportioned Sindh 69 61 possible by delinking horizontal distribution from current by federal law, keeping in view the changing circumstances. Unlike Rural 47 61 population, which in India also has political connotations.The 1971 Pakistan, which applies the vertical distribution criteria to the Khyber Pakhtunkhwa 73 75 population is the benchmark for horizontal distribution. The PIPED WATER divisible pool as a whole, Germany applies it to each tax separately. fourteenth FC gave 10 percent weight to the population of 2011 for The criteria used for vertical distribution also varies from tax to tax, Balochistan 43 41 Pakistan 35 26 the .rst time. It also introduced forest area as an indicator. The as may be seen in Table 10. These transfers aim to reduce disparity *2007-08 highest weightage continues to be .scal capacity/income between länders by balancing .scal capacity and .scal need. Fiscal Source: Pakistan Bureau of Statistics, Pakistan Social and Living Standard Urban 62 52 distance. capacity is de.ned by average tax revenue and .scal need is MeasurementSurveys assessed on the basis of the size and density of population. The For a comparison of more indicators, please refer to table 2 on 'social sector Rural 21 11 Table 9 : Horizontal Distribution Indicators in India länder with .scal capacity greater than .scal need has to transfer indicators' on page # 19 resources to länder where need exceeds capacity. Federal grants Weights in Weights in areinaddition. Indicators Thirteenth FC Fourteenth FC Public Spending on Education (as a percentage of GDP) Table 10: Germany: Horizontal Distribution Criteria Population (1971) 25 17.5 Average Average 2010-11 2011-12 2012-13 2013-14 Tax Criteria Pre-NFC Post-NFC Population (2011) 0 10 0.36 0.33 0.28 0.31 0.34 0.32 Income Tax Residency principle Federal Government Fiscal capacity/Income 47.5 50 Provincial Government 1.37 1.45 1.63 1.78 1.77 1.66 distance Corporate tax Residency* principle Punjab 0.73 0.79 0.84 0.86 0.86 0.84 Area 10 15

Sindh 0.33 0.40 0.33 0.43 0.42 0.39 Forest Cover 0 7.5 75 percent distributed on the basis of population and remaining 25 Khyber Pakhtunkhwa 0.24 0.15 0.33 0.37 0.35 0.30 Fiscal discipline 17.5 0 VAT percent distributed to those Länder Baloshistan 0.07 0.11 0.12 0.13 0.15 0.13 where the per capita tax revenue is Source:EconomicSurvey2013-14,GovernmentofIndia below average Total 1.74 1.78 1.91 2.09 2.12 1.98 Tax capacity of the states is estimated on the basis of gross state *Locationofproduction,notheadquarter. Source: PolicypaperNo.25,SocialPolicyandDevelopmentCentre domestic product per capita. Inter-state equity is sought to be Source: Arthur B. Gunlicks, Issues in German Politics: The Länder and German Federalism.ManchesterUniversityPress,2003. 10 11 ProvincialFinanceCommissions Way Forward report on resource mobilization at federal Constitution stands in the way of a rollback. Just as the provinces in Pakistan have more subjects than they can The 7th NFC award has substantially increased provincial revenues. and provincial levels, devolved versus For greater tax revenue, the federal raise revenues from within their jurisdictions, the subjects Smaller provinces gained at the expense of the federal government integrated tax collection, allocative government has no choice but to expand devolved to the district governments also have expenditure and Punjab. The former experienced major reduction in its share in efficiency and expenditure analysis, and the base and invest in effective collection requirements far in excess of their own revenues. The Provincial the vertical distribution and the latter found its share reduced as rationalization of subsidies and grants. This and the provinces have to focus on fully Local Government Ordinances (LGOs) 2001 devolved substantial multiplecriteriareplacedthesolecriterionofpopulation. could not but lead to the continuation of the exploiting the potential of sales tax on administrative and .nancial authority for basic social services. present dispensation by invoking Article 160 services, agricultural income tax and Provincial Finance Commissions (PFCs) were set up to deal with The federal government, which collects the taxes, has failed to (6) at least for the .scal year 2015-16. The property taxes.This will allow the provinces varying levels of development by making formula based transfers achieve the projected increase in the tax to GDP ratio to 15 percent, federal budget announced for 2015-16 has to rejuvenate the provincial .nance every three years.The PFCs were ahead of the NFC in using multiple while the expenditures on debt servicing and defence have been done precisely that (Table 15). Given the dire commissions as vehicles for better service criteria,asindicatedinTable11. rising. As the devolution of subjects to provinces under the 18th macroeconomic straits in which the federal delivery at the local level. Expenditures amendment succeeded the 7th NFC award, the wrong sequencing government .nds itself, it will not be have not matched the increased revenue Table 11: Weights Used in Horizontal Distribution in made provinces demand additional resources, phasing of surprising that an order similar to the because of the weakness at the local level, a the Provincial Finance Awards devolution and transitional arrangements for vertical health and Presidential Order No.1 of 2006 is issued to situation that might change after the population programmes and the Higher Education Commission. cover the remaining years of the tenure of the elections. present government. An indication was Indicators Punjab Sindh KP Balochistan Even under 7th NFC award, one percent of the divisible pool before distributionwasallocatedtoKPforwaronterror. given in the Senate by a federal minister who As for the NFC, the battleground is now claimed that the Constitution bound the likely to move from revenue to natural Weights Since the 7th NFC award, a signi.cant portion of the overall .scal federal government to set up an NFC every resources. The constitutional provisions .ve years, which it had, but not to give the related to oil, gas and hydroelectric Population 67% 50% 50% 50% de.cit has been .nanced by forcing the provinces to maintain surplus budgets. Donors have also pointed out the generosity of award.⁰ This is correct. Article 160 (2), makes resources remain to be ful.lled in letter and Backwardness 33% 17.50% 25% the 7th NFC towards the provinces. Article 160 (3A) of the it “the duty of the National Finance spirit. Balochistan's insistence on the constitution bars any reduction in the share of the provinces. In the Commission to make recommendations to recognition of its constitutional right Tax terms of reference of the 8th NFC, therefore, the federal the President.” Until the NFC delivers, the before the Ministry of Petroleum and 7.50% effort/collection government seems to be looking at other ways of achieving the business of the state has to go on, leaving Natural Resources can award new licenses same objectives. For the .rst time, it wants the NFC to consider the grounds for the President to issue the to oil and gas exploration companies, Performance 5% assessment and allocation of resources to meet expenditures relevant order under Article (4). It has been showswhichwaythewindisblowing. related to Azad Kashmir, Gilgit-Baltistan and FATA, regions which officially declared that the “present Award Area 50% are not provinces but have claims on resources. The federal will remain operative till 9th NFC Award is It was seen above that the while the total implemented. As such, the shares of the expenditure on poverty reduction Development government also wants the provinces to share the burden of provinces in the divisible pool have been remained the same in the post-NFC period, incentive/ managing natural disasters and controlling terrorism. It also seeks 25% worked out in accordance with the 7th NFC the large bulk of it was shifted to the infrastructure discussion on the exercise of the borrowing powers conferred by Award, 2009.” As usual, the budget for 2015- provinces. Provincial Finance Commissions, deficiency the constitution on the provinces. The federal government's position was summed up by the .nance minister at the .rst 16 shows that revised transfers for 2014-15 when set up after the elections, will be Transitional meeting of the 9th NFC as he “underlined the need to take into were less than the budgeted and the better positioned to use an effective criteria 20% assistance (grants) account signi.cant expenditures the country is expending on budgeted allocations for 2015-16 are higher to allocate resource for poverty reduction .ghting war on terror” and “the need for improving overall than the revised as ells the budget at the district level.They will be well-served Source: Shahid Kardar, “Local Government Finance in Pakistan Post 2001,”The Lahore resource-base,sothattheserisingexpenditurescanbemet.”⁵ allocations for the previous year (Table 15). by the Multidimensional Poverty Index JournalofEconomics,SpecialEdition,2006 On their part, the provinces are unable to (MPI), which can be deconstructed by The recent local government legislation in all provinces use nearly With a reduced share, the largest province, Punjab, is pressing for a utilize fully even lower than the budgeted region and dimension. It is now an the same indicators as principles of provincial transfers to local higher share in the divisible pool. According to the technical transfers. They need to invest in improving acknowledged tool for effectively targeting governments. In the KP law issued in 2013, which is considered to representative of Punjab at the NFC, the province had sacri.ced theirabsorptivecapacity. the most deprived. More important, the be better than the other provinces, .scal need, .scal capacity, .scal enough in the 7th NFC and would not support any change in the MPI will position the policy maker better to effort and .scal performance, poverty, population and inter-provincial distribution formula.⁶ The per capita transfers to In so far as taxes are concerned, the fact of the do better in regard to Sustainable infrastructure lag have all been mentioned. The quantum of Balochistan, KP and Sindh are 2.2,1.3 and 1.3 times higher than matter is that the federal government has Development Goals than their vertical transfers and the actual weights allowed to different Punjab. Resultantly, the per capita development expenditure in nothing to give and the provinces know it. performance in the case of the Millennium indicators for horizontal distribution will be known once the local Balochistan, KP and Sindh is 2.5, 2.7 and 1.7 times higher than The maximalist positions taken by both sides DevelopmentGoals. governments are in place and the PFCs meet. At present, the share Punjab. These provinces do not, however, feel satis.ed with the will only cause a stalemate, facilitating the of local governments in provincial expenditures is far from higher transfers. Balochistan, the greatest bene.ciary of the 7th maintenance of the status quo, as the satisfactory. As Table 12 shows, there is low resource availability at NFC award, wants an increase in the vertical share of the provinces the local government level particularly in Sindh and KP. No as well as an increase in its share in the horizontal distribution. It information is available for Balochistan, a province which took the proposed the reduction of the weight given to population from the lead in holding local elections and installed local governments. present 80 percent to 50 percent. Its chief minister says that the Elections have now been held in KP and political leadership is total development budget of the province is Rs 45 billion, while 1. TheConstitutionoftheIslamicRepublicofPakistan1973:AsamendedbytheConstitution(EighteenthAmendment)Act,2010. CentreforCivicEducation,Islamabad. promising the transfer of 30 percent of development funds to the education alone requires Rs. 55 billion.⁷ The KP government 2. On 21st July, 2005 an informal meeting was held which could not reach a consensus on the formula for resource distribution.The provincial share was increased under the Distribution of Revenues local level. In the budget of 2014-15, it was less than two percent. In complains that the bulk of the federal PSDP is spent in the larger andGrants-in-AidOrder2006. the larger provinces of Punjab and Sindh, elections are scheduled provinces of Punjab and Sindh. The province wants an increase in 3. Pervez Tahir,“Problems and Politics of Fiscal Federalism in Pakistan.” In Problems and Politics of Federalism in Pakistan, edited by Pervaiz Iqbal Cheema and Rashid Ahmad Khan. Islamabad Policy ResearchInstitute.2006. tobeheldinSeptember2015. its speci.c allocation for the war on terror, a massive reduction of 4. ReportonBiannualMonitoringontheImplementationofNationalFinanceCommission(NFC)Award,MinistryofFinance. ThelastavailablereportrelatestoJuly–December2013. Table 12: Transfers to Local Government as % of the federal share in the divisible pool and inclusion of customs 5. MinistryofFinance,PressRelease,28April,2015. Total Provincial Expenditures duties in it, besides the transfer of the federal excise duty on oil to 6. TheExpressTribune,April29,2015. the province concerned as perArticle 16 1 (b).⁸ Sindh has 2013-14 B 2013-14 R 2014-15 B 7. TheExpressTribune,May18,2015. demanded the increase of provincial share to 60 percent, mainly 8. TheExpressTribune,May11,2015. Punjab 22.3 23.7 22.1 becauseitfacesaterroristthreatsimilartotheKPprovince.⁹ 9. TheExpressTribune,April28,2015. 10. Dawn,May13,2015 Sindh 5.7 6.3 6.2 These divergent positions have emerged over a period of time. 11. MinistryofFinance,BudgetinBrief2015-16,,p.15. Weary of opening another front, the federal government .rst 12. TheExpressTribune,June3,2015. Khyber 4.6 4.6 4.6 delayed the setting up of the 8th NFC and then hurriedly called the Pakhtunkhwa .rst meeting just before the budget, only to set up subgroups to Balochistan - - - 13 Source:ProvincialAnnualBudgetStatements2014-15 Table 13: Per Capita Revenues and Expenditures by Province Table 14: Pre and Post NFC Utilization Rates of Development Expenditure by Province Xtimes 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 increase Punjab Sindh

Punjab Utilization Utilization Budgeted Revised Budgeted Revised Rate Rate Total Revenue 4,133 5,422 5,945 6,886 7,729 9,741 2.3 (Rs. in (Rs. in (Rs. in (Rs. in (%) (%) Federal Transfers 3,344 4,706 5,190 5,584 6,216 7,583 2.3 Billion) Billion) Billion) Billion)

Provincial Taxes 306 333 434 794 993 1,695 5.5 2008-09 160.0 173.3 108.3 89.3 87.1 97.5

Provincial Non taxes 293 244 256 275 221 605 2.1 2009-10 175.0 145.6 83.2 112.9 98.5 87.3

Loans and Grants 190 141 77 262 364 - - 2010-11 193.5 138.8 71.7 153.1 83.6 54.6

Current Expenditure 3,119 3,836 4,453 5,261 5,307 6,600 2.1 2011-12 220.0 165.5 75.2 161.1 155.9 96.8

Development Expenditure 1,362 1,095 1,581 1,519 1,888 2,042 1.5 2012-13 250.0 166.9 66.7 231.2 143.3 62.0

Sindh 2013-14 290.0 224.1 77.3 229.9 152.0 66.1

Total Revenue 5,695 7,658 8,649 9,777 10,475 12,456 2.2 2014-15 345.0 215.4

Federal Transfers 4,454 6,478 6,426 7,039 8,193 9,644 2.2 Average Dev. Exp 2008-09 to 335.0 318.9 95.2 202.2 185.6 91.8 Provincial Taxes 223 282 620 702 813 1,101 4.9 2009-10 Average Dev. Exp 2010-11 to Provincial Non Taxes 313 268 277 538 115 375 1.2 953.5 695.3 72.9 775.3 534.7 69.0 2013-14 Loans and Grants 421 276 588 704 479 213 0.5 Khyber Pakhtunkhwa Balochistan Current Expenditure 4,363 5,739 6,718 6,624 7,008 9,064 2.1 Utilization Utilization Budgeted Revised Budgeted Revised Development Expenditure 1,581 1,444 2,574 2,244 2,582 3,492 2.2 Rate Rate

Khyber Pakhtunkhwa (Rs in (Rs in (Rs in (Rs in (%) (%) Billion) Billion) Billion) Billion) Total Revenue 6,298 8,948 8,650 9,254 11,192 12,864 2.0 2008-09 41.5 39.0 93.9 15.7 15.2 96.3 Federal Transfers 3,313 6,317 6,972 7,579 8,665 10,216 3.1 2009-10 51.2 46.3 90.6 18.5 25.4 137.3 ProvincialTaxes243739431202008.3 2010-11 69.3 65.0 93.8 26.8 34.7 129.6 Provincial Non Taxes 995 1,002 199 379 622 1,947 2.2 2011-12 85.1 84.5 99.2 31.4 34.0 108.4 Loans and Grants 1,896 1,485 1,341 1,138 1,473 - - 2012-13 97.5 88.1 90.4 35.8 35.3 98.6 Current Expenditure 4,228 4,868 5,885 6,599 6,916 9,003 2.1 2013-14 118.0 104.8 88.9 43.9 37.0 84.3 Development Expenditure 1,644 2,067 2,911 2,815 2,685 4,013 2.4 2014-15 139.8 50.7 Balochistan Average Dev. Exp 2008-09 to 92.7 85.3 92.0 34.3 40.6 118.4 Total Revenue 9,736 14,185 14,896 16,736 18,357 18,733 1.9 2009-10

Federal Transfers 4,800 11,348 11,917 13,690 15,274 16,723 3.5 Average Dev. Exp 2010-11 to 369.9 342.4 92.6 137.9 141.0 102.3 ProvincialTaxes1110111128363.3 2013-14

Provincial Non Taxes 273 184 566 920 447 579 2.1

Loans and Grants 4,547 2,539 2,309 2,008 2,339 1,060 0.2 Table 15: Provincial Shares in Federal Taxes (Rs million)

Current Expenditures 6,742 9,693 9,584 10,720 12,960 14,312 2.1 Budget 2014-15 Revised 2014-15 Budget 2015-16

Development Expenditures 2,344 2,734 3,195 4,400 4,375 5,089 2.1 Punjab 812,786 751,457 894,653 Sindh 464,007 413,511 482,801 Source:MinistryofFinance,FiscalOperations. KP(Inclusive of 1% for War 283,675 254,765 300,452

Balochistan 159,714 154,976 171,488

Total: 1,720,182 1,574,709 1,849,394

Source:MinistryofFinance,BudgetinBrief. 14 15 Opinion

TransfertoProvinces promoted .scal indiscipline and thus contributed immensely to The 7th NFC Award represents a major step towards .scal perpetuating the very macroeconomic instability that hinders decentralization. The share of the divisible pool increased from 50 sustained higher economic growth. In a federal state like Pakistan, percent to 56 percent in 2010-11 and further to 57.5 percent in .scal decentralization is essential for improving the quality of 7th NFC Award: Has it worked? 2011-12 onwards. Likewise, other transfers to the provinces services provided to the masses. However, if .scal decentralization (straight transfer and special grants/subventions) also increased is badly managed, it can create serious difficulties for the provinces substantially during the Award period. Transfers to provinces are aswellasforthefederation. well-documented inTable 1. A cursory look at this table is sufficient to see that a sizeable sum of resources have been transferred to the There is also a general consensus among economists that the provinces during the 7th NFC Award period, both in terms of the agreement on the 7th NFC Award was based purely on political, divisible pool and other transfers. The year 2010-11 represents the rather than economic, considerations . The Award was .nalized in .rst year of the new Award. Compared to the Rs. 574 billion under haste, no proper homework was carried out, it lacked proper resources between the federal and (KPK) were reduced by 1.27 percent, 0.39 divisible pool and the total transfer of Rs. 737 billion in 2009-10, economic foundations, and the revenue projections for the Award provincial governments. The President, percent and 0.26 percent, respectively.The provinces received Rs. 835 billion under the divisible pool (an period were grossly unrealistic. The Award has major weaknesses through the Presidential Order, provides reduction in the total share of three increase of 45.5 percent) and Rs. 1052 billion as total transfers (an that create serious difficulties for subsequent macroeconomic legal cover to the recommendations of the provinces (1.92 percent) was passed on to increaseof42.7percent)inthe.rstyearofthenewAward. management. NFC. Balochistan by increasing its shares by 1.92 percent. Thus, Balochistan was the major There are, thus, two notable developments in the 7th NFC Award. First, the scope of the Award was too extensive and its The7thNFCAward bene.ciary of the 7th NFC Award as its Firstly, the amount transferred to provinces during the .ve years implementation was too rapid to manage .scal decentralization in Before discussing the 7th NFC Award, a share in the net divisible pool was (2005-/06 to 2009/10) prior to the new NFC Award amounted to Rs. an orderly manner. A massive amount of resources were transferred brief discussion of the 5th and 6th NFC increased from 7.17 percent to 9.09 2613 billion. In comparison, the amount of resources transferred to to provinces in too short a period and without sufficient Awards is essential for appreciating the percent.The share of Punjab declined from provinces in .ve years under the new NFC Award totaled Rs. 6671 consideration given to their .scal or .nancial discipline and consensus developed in the 7th NFC 53.01 percent to 51.74 percent. Thus, billion – almost 2.6 times more resources than were transferred capacity to spend this money prudently. Accordingly, it not only Award.The 5th NFC gave its Award in 1996. Punjab rendered a major sacri.ce to previously. Second, the share of divisible pool as a percentage of aggravated macroeconomic instability, but also adversely affected The salient features of this Award included: provide more resources to Balochistan. the total FBR collection increased from an average of 39 percent to the provision of public goods and services delivery–akey i) expanding the divisible pool by Recognizing the role of KPK as a frontline 57 percent during the same period – an increase of over 18 expectation from the public in the event of .nancial Dr. Ashfaque H. Khan including all taxes; ii) .xing the sharing province in the war against terrorism, the percentage points – under the 7th NFC Award. Such comparisons decentralization. ratio in the divisible pool taxes between Award provided an additional one percent clearly suggest that provinces received considerable amounts of Second, the timing of the 7th NFC Award was inappropriate. The Principal and Dean, federal and provincial governments at 62.5 of the net divisible pool to KPK to meet the resourcesduringthe.veyearsofthenewAward. expensesofthewaronterror. Award was agreed upon and implemented from the 2010-11 .scal School of Social Sciences and percent and 37.5 percent respectively; iii) Table 1: Transfer to Provinces Humanities, allocating special grants/subvention of Rs. (Billion Rs.) year when Pakistan was facing serious .scal challenges. These challenges demanded prudent .scal behavior on part of both the National University of Sciences and 3.3 billion and Rs. 4.0 billion for NWFP (now While population was once the sole basis Special Divisible Pool as % Straight Technology, Islamabad. Year Divisible Pool Total of total FBR tax federal and provincial governments. Transferring such a sizeable KPK) and Balochistan, respectively, to be for revenue sharing in prior awards, the 7th Transfer Grants/ collection given for .ve years from 1997-98 and NFC Award based its allocations and Subventions sum of resources to provinces instead encouraged them to pursue increased annually in line with the rate of adjustments on multiple criteria—this 2004-05 205 41 35 281 35 lax expenditure policies which then contributed to the rise in .scal sound system of inter- in0ation; iv) encouraging provincial consensus is one of the greatest 2005-06 245 57 64 366 34 de.cit (.scal de.cit rose from 6.2 percent of GDP in 2009-10 to an governmental .scal transfers governments to achieve a revenue growth achievements of the 7th NFC Award.These 2006-07 321 70 29 420 38 average of over 8.0 percent in the next three years) . The timing of A include population (82 percent), poverty this Award was also inappropriate because the interest payment – constitutes the cornerstone of strong and of14.2percenttogetmatchinggrants;and 2007-08 391 66 33 490 39 or backwardness (10.3 percent), revenue the single largest responsibility of the federal government – was stable public .nances in a country. In v) discontinuing cash development loans. 2008-09 477 82 41 600 41 collection or generation (5.0 percent), and almost doubled in just three years, from Rs. 387 billion in 2006-07 Pakistan, about 93 percent of resources are The 6th NFC was constituted by the 2009-10 574 81 82 737 43 generated at the federal level while the President on July 22, 2000, but it could not area or inverse population density (2.7 to Rs. 661 billion in 2009-10. Security and defense related 2010-11 835 163 54 1052 54 remaining seven percent are collected at give the Award during its life, which percent). Special care has been taken for expenditure also rose rapidly during the same years due to geo- 2011-12 1063 146 54 1263 57 the provincial level. Provinces, therefore, expiredinJuly2005. Balochistan in the 7th NFC Award. For strategic developments and the accelerating war on terror. rely heavily on federal resources for example, the share from the divisible pool 2012-13 1118 104 61 1283 58 Furthermore, power sector subsidies were rising and the federal meeting their expenditure requirements. The 7th NFC was constituted in July 2005 was guaranteed at Rs. 83 billion in the .rst 2013-14 1287 124 54 1465 57 government was continuing to provide support to the Inter-governmental .scal transfers serve and gave its Award in 2010. The Award year (2010-11) of the Award, which was 2014-15 1477 97 34 1608 57 malfunctioning public sector enterprises (PSEs) in order to keep two purposes. First, they are meant to became effective from July 1, 2010. The more than double from the actual share in them a0oat. None of these growing .nancial needs of the federal Source: Pakistan Economic Survey 2010-11 (Table 4.9: PP 60) for the period 2004/05 to 2008/09; address the vertical imbalance, or when highlights of the 7th NFC Award included 2009-10. government were accounted for when determining the amount Pakistan Economic Survey 2012-13 (Table 4.7: PP 56) for the period 2009/10 to 2011/12; andtimingoftheresourcestobetransferredtoprovinces. sub-national governments' (in our case, major adjustments in vertical as well as Pakistan Economic Survey 2013-14 (Table 4.6: PP. 68) and Budget in Brief 2014-15 and provinces) revenues are unable to meet horizontal distributions of resources. First, It was further guaranteed that Balochistan 2015-16 for 2013/14 and 2014/15, respectively. their expenditure requirements due to the the collection charges which the federal would receive a provincial share from the Third, the federal government appears to have lost interest in asymmetrical assignment of functional government was deducting prior to the divisible pool based on the budgeted or At the same time, however, the spending responsibilities of the undertaking any meaningful tax reform because of the realization responsibilities and .nancial powers 7th NFC Award were reduced from .ve targeted revenue of the Federal Board of provinces have also increased, particularly spending on the social that the bulk of any additional tax revenue collected would go to among different governmental levels. percent to one percent, thereby Revenue (FBR) from 2011-12 for the next sector. How have the newly allocated and transferred resources provinces for likely use in spending rather than reducing budget Second, inter-governmental .scal enhancing the divisible pool by four four years while all other provinces would been used by provinces to improve the lives of the common man in de.cit. The federal government itself, on the other hand, will incur transfers help alleviate horizontal percent and reducing the federal get their shares on the basis of actual their respective provinces? Have these resources improved the thepoliticalcostofsuchreforms,forlittle.nancialorpoliticalgain. imbalances, or when the revenue capacity government's share by the same percent. collection. In the event of any shortfall in social indicators of the respective provinces? What are the risks of the provinces is inadequate for meeting Second, the share of provinces increased FBR projected revenue (a usual occurrence associated with the new Award and can Pakistan maintain .nancial Fourth, as a result of such a considerable transfer of resources to the theirownexpenditureliabilities. from 50 percent to 56 percent in the .rst for the last several years) and hence, stability with it? Was this Award a political act or did it lack sound provinces,mostoftheirspendingwascoveredbythefunds year (2010-11) of the Award and further to shortfall in the divisible pool, Balochistan economic foundations?Was the timing of the Award correct?These In recognition of the need to redress these 57.5 percent in the second year (2011-12) would be compensated by the Federal aretheimperativequestionsthatthispaperattemptstoanswer. imbalances in a fair and orderly fashion, onwards. Accordingly, the share of the Government out of its share in the divisible Article 160 of the Constitution of Pakistan federal government declined to 44 pool (See Ministry of Finance (2011) for an Hasthe7thNFCAwardWorked? provides for the establishment of a percent in 2010-11 and further to 42.5 extensivediscussionon7thNFCAward). There is a general agreement among professional economists that National Finance Commission (NFC) at percentinsubsequentyears. the 7th NFC Award, instead of addressing Pakistan's .scal intervals not exceeding .ve years.The NFC challenges, has in fact compounded the country's .nancial provides recommendations to the In horizontal distribution, the shares of difficulties. Fiscal discipline is regarded as the cornerstone of overall President of Pakistan on the distribution of Punjab, Sindh and Khyber Pakhtunkhwa macroeconomic balances. The 7th NFC Award, in contrast,

16 17 Table 2: Key Social Sector Indicators received from the federal government. treasury bill interest rate on their cash remainadistantdream. Change in Provinces, then, had little incentive to raise balances. This is a perverse incentive with Indicators 2007-08 2008-09 2011-12 2012-13 2013-14 2013-14 over their own revenues, further dampening long term implications for human 7th NFC Award: Implications for 2012-13 their .scal efforts. Consequently, the developmentandeconomicgrowth . SocialSector Education (Overall Literacy Rate (%) ) provincial tax-to-GDP ratio which used to Social sector responsibilities were hover around as a percentage of the GDP, Seventh, the 7th NFC Award has, transferred to the provinces under the Overall Literacy Rate (%) 56 57 58 60 58 -2 hasnowbeenreducedtoonehalf . additionally, forced the federal 18th amendment. With such a sizeable Punjab 59 - 60 62 61 -1 government to indulge in 'ingenious addition of resources transferred to Sindh 56 - 60 60 56 -4 Fifth, with the bulk of resources transferred accounting,' thereby damaging Pakistan's provinces under the new Award (Rs. 6.7 to provincial governments, the .scal statistics. With few resources under trillion in .ve years under the 7th NFC year KPK 49 - 52 52 53 +1 responsibility for managing .scal its command on one hand and showing a versus Rs. 2.6 trillion in previous .ve years), Balochistan 46 - 46 44 43 -1 discipline in the country has also been rising tax-to-GDP on the other, the federal the people of Pakistan were expecting delegated to the provinces. Keeping the government shifted many items from non- signi.cant improvements in key social Education (Net Primary School Enrolment Rate [%]) budget de.cit low is no longer under the tax revenue to 'other taxes'. For example, sector indicators. Unfortunately, many purview of the federal government alone. the Gas Infrastructure Development Cess indicators have, on the contrary, Overall Pakistan 55 57 57 57 57 0 With already little capacity to spend (GIDC), Natural Gas Development deteriorated at the national as well as Punjab 61 - 64 64 64 0 money prudently, it is difficult to expect Surcharge (NGDS), and Petroleum provincial levels. Table 2 documents some Sindh 51 - 50 52 48 -4 provincial governments to maintain .scal Development Levy (PDL), which all used to key social sector indicators since 2007-08 discipline in their respective provinces. appear as surcharges and, thus, counted as and until 2013-14 (the latest information KPK 49 - 53 54 54 0 Pakistan's overall macroeconomic non-tax revenue, have now been brought available). Balochistan 41 - 39 45 39 -6 management would therefore be facing under 'other taxes'. Similarly, privatization seriouschallengesgoingforward. proceeds (for example, from sale of the A cursory look at this table shows that key Health (Proportion of Fully immunized children (12-23 months) governments banking share) that used to social sector indicators are exhibiting a Overall Pakistan 73 78 80 82 76 -6 Sixth, the 7th NFC Award has forced the appear as .nancing items (below the line negative trend, perhaps for the .rst time. federal government to take an item) are now appearing as non-tax Pakistan's overall literacy rate has fallen by Punjab 76 - 86 89 86 -3 unconventional route towards achieving revenue via the pro.t of the State Bank of two percentage points (from 60 percent to Sindh 67 - 71 74 61 -13 their .scal de.cit target. Pakistan is Pakistan (SBP)⁴ . As a now 'above the line 58 percent) in 2013-14 over 2012-13. 74 - 80 76 75 currently under the IMF Program and it is item,' this is helping the government keep Punjab, Sindh and Balochistan witnessed a KPK -1 the responsibility of the federal the budget de.cit arti.cially low through decline of 1.0, 4.0 and 1.0 percentage Balochistan 57 - 37 45 41 -4 government to meet the IMF conditions, accounting tricks. Similarly, foreign grants points respectively while KPK showed a 1.0 including that of budget de.cit. Since the always treated as .nancing items (below percentage point improvement. Similarly, Health (Infant Mortality (Per 1000 Live Births) bulk of resources is being transferred to the line items) are now being treated as the net primary school enrollment rate for Overall Pakistan 69 - 63 - 65 +2 the provinces with little or no non-tax revenue, thus in0ating overall Pakistan (57 percent) saw no improvement responsibility to deliver on commitment, revenue to arrive at a lower budget de.cit in the last .ve years. The rate in Punjab has Urban 45 - 45 - 45 0 the federal government is forced to take number. not improved since 2011-12, enrollment in Rural 79 - 70 - 74 +4 actions which are not consistent with Sindh declined by four percentage points responsible .scal management. For Finally, given that the bulk of resources are since 2012-13, KPK witnessed no Coverage of Tap Drinking Water (percent) example, the federal government released being transferred to provinces under the improvement since 2012-13, and Overall Pakistan 35 29 30 30 -4 resources in such a manner that the 7th NFC Award, the responsibility of Balochistan witnessed a sharp decline (six - provinces were unable to spend this maintaining overall .nancial discipline, percentage points) over 2012-13. Punjab 28 - 22 22 22 -5 money in time. Such a method of resource keeping the budget de.cit under control, Education indicators do not show any Sindh 45 - 42 43 43 -1 release was bound to impact social sector and, hence, maintaining macroeconomic improvementovertheseveralyears. spending and progress towards the stability in the country have shifted to the KPK 51 - 41 44 44 -13 Millennium Development Goals (MDGs), provinces. The federal government alone Health indicators also exhibit the same Balochistan 40 - 38 34 34 -2 which is the prime responsibility of the cannot increase the country's tax-to-GDP. deteriorating trend. As shown in Table 2, provincial governments since the 18th Without provinces mobilizing their own the proportion of fully immunized children Source: PSLM Survey 2012-13 and 2013-14, Pakistan Bureau of Statistics, Islamabad Amendment. Furthermore, the federal resources and complementing the efforts (12-23 months) declined by six percentage Infant mortality (per 1000 live births) also NFCAwardhavegone. ought to signi.cantly improve their own government started encouraging of the federal government, raising the tax- points over 2012-13. A similar worsening exhibited a rising trend at both the revenue collection and/or curtail provincial governments to not spend to-GDP ratio to the average of developing trendcanbeobservedacross provinces. money by giving them a three-month countries (16-17 percent of GDP) will nationalandrurallevels. HowtoSalvagethe7thNFCAward? unnecessaryexpenditure. The improperly planned, timed and Providing safe drinking water is a critical managed 7th NFC Award has created Second, under the 7th NFC Award almost responsibility of provincial governments. serious challenges for macroeconomic three times more resources were Despite receiving an enormous amount of management in Pakistan. A more transferred to the provinces. Why should resources through the 7th NFC Award, the preferable option should have been a the federal government, with its drastically provinces failed miserably in this regard. gradual move towards extensive .scal reduced resources, still .nance provincial The coverage of tap drinking water, of late, decentralization. This would have given development projects? A better route has declined at the national as well as at provinces ample opportunity to build their would be for the federal government to provinciallevels. .scal management capacities as well. The .nance only federal projects or damage has already been done as far as strategically important ones. Provincial This worsening of social indicators clearly .nancial discipline is concerned. The real development projects should be .nanced suggests that for national and provincial challenge is now salvaging the ongoing from the respective provincial governments, provision of basic social Award until we have consensus on a new government'srevenues. services to their people have not been a one.Somesuggestionsareinorder. priority. Such poor service delivery re0ects Third, one of the special features of the 7th a complete breakdown of governance⁵ . First, the 7th NFC Award should not NFC Award was the recognition of the People are thus, more than justi.ed in weaken the federal government's ability to requirements of Balochistan. It decided questioning where the Rs. 6.7 trillion reduce .scal de.cit and public debt. In this that Balochistan, as opposed to the other transferred to the provinces under the new connection, provincial governments threeprovinces,wouldreceiveprovincial 18 19 Opinion share in the divisible pool on the basis of programs and service delivery. The budgeted FBR revenue instead of actual remaining 25 percent of the divisible pool Unfortunately, key social FBR collection for the next four years (that maybelinkedwithperformanceprogress. is, from 2011/12 to 2014/15). Shortfall, if indicators have deteriorated, any, would be borne by the federal Finally, in the case of federal projects re0ecting a lack of priorities of the government itself. The federal executed in the provinces and any debt so provincial governments as well as Provincial Finance Commission government has paid Rs. 67.4 billion to acquired, the respective provincial a collapse of governance Balochistan during the last four years of governments may share debt servicing pertaining to public service the Award⁶ . From the 2015-16 .scal year costswiththefederalgovernment. onwards, Balochistan's share should be delivery. Besides, the lack of .scal Awards: A tool for inclusive development calculated on the basis of actual FBR The above-listed recommendations are discipline and capacity of the collection – the same practice applied to not exhaustive. A variety of international provinces in spending money allotherprovinces. experience is available to strengthen inter- prudently have widened the .scal provincial relations. Pakistan needs to use de.cit. Fourth, to achieve the .scal de.cit target forums like the CCI or the NEC in order to abundance of both theoretical and 08 to 2013-14, this pace in growth without resorting to accounting tricks, promote cooperation between federal analytical literature highlighting gains moderated substantially as NER witnessed some hard binding constraints must be and provincial governments in order to The damage has already been from .scal decentralization, which is an increase of only two percent. More put in place, in the form of binding the bettermanage.scaldecentralization. done. The responsibility of believed to mitigate .scal disparities interestingly, growth in NER during the provincial governments to deliver maintaining .nancial discipline in among regional governments and to local government system is visible in every required surpluses to meet the the country has shifted towards assure the delivery of basic public services province, while magnitude varies from consolidated budget de.cit target. The to citizens across the country. It increases eight percent to 18 percent. In contrast, provinces. Federal government Council of Common Interests (CCI) or efficiency that leads to consequent welfare during 2007-08 to 2013-14, NER in both National Economic Council (NEC) may be Conclusions alone cannot deliver on .scal gain. It leads to enhanced accountability, Sindh and Balochistan showed a decline of used as forums in order to decide the level commitment with the IMF unless it increased transparency and expanded three and .ve percent respectively, of surplus for the provinces.The sooner we A broad-based, orderly and well- is ably supported by the provinces. constitutional participation in decision despite hefty increase in allocations move, the better it is for the country's .scal making at the regional level. These gains towards the education sector after the 7th managed .scal decentralization is This paper provides several stability. are attributed to moving governance NFC award. Even Punjab and Khyber recommendations to salvage the expected to improve public closer to the people by providing Pakhtunkhwa showed a moderate growth Fifth, the federal .nance minister has service delivery hence improving 7th NFC Award as well as provides Muhammad Sabir equitable resources in line with ofthreeand.vepercentrespectively. recently announced that the provincial the living conditions of the people. recommendations for the new expenditure needs through a transparent governments could borrow up to 0.5 Unfortunately, .scal Award. The list of Principal Economist and Unit Head mechanism. However, there is a need to In the presence of local governments and percent of GDP each year. Control of Public Finance Unit analyze whether the process of .scal PFCs, gender equality in education decentralization implemented recommendations is not provincial borrowing should not only Social Policy and Development Centre decentralization along with PFCs have had improved. The ratio of girls' enrollment to exhaustive. There are many cover borrowing from domestic and through the 7th NFC Award was (SPDC) a positive or negative impact on boys' enrollment increased to 86 percent international markets. Rather, domestic too-extensive, too-fast and international experiences developmentinPakistan. in 2007-08 from 74 percent in 2001-02, borrowing must include borrowing from ocal governments have had a managed in a disorderly available in different parts of the only to decline by three percent in the the Central Bank (SBP) as well as from chequered history in Pakistan. A look environment resulting in serious worldthatPakistancanlearnfrom. Chart 1 represents the trend in primary Net same amount of time. During local provincial banks. These provincial banks Linto the past reveals that local Enrollment Rate (NER), which is simply a governments and PFCs, each province macroeconomic challenges. could become a captive source of government enjoyed an unprecedented ratio of children aged 5-9 years enrolled in showed improvement in gender equality .nancing . This can be materialized by Almost three times more Strengthening .scal discipline at .scal autonomy during 2001 to 2007-08. primary classes (1 to 5), divided by the in education and quantum of increase introducing Provincial Fiscal resources transferred to provinces both the federal and provincial During this period, Provincial Finance number of children in the same age ranged between 8 to 18 percent. However, Commissions (PFCs) were constituted for Responsibility and Debt Limitation Laws during 7th NFC Award period levels are essential for restoring cohort. It shows that Pakistan made later on every province showed a decline similartothosepresentatthefederallevel. the .rst time in all the provinces of .scal sustainability. Without compared with .ve years of the Pakistan. These commissions formulated a pre-Award period, promoted .scal strong tax efforts and sound Chart 1: Trend in NER Primary Sixth, a high-powered, permanent transparent mechanism for both vertical 70 national .nance commission may be indiscipline in provinces as well as public .nance, the current (distribution of resources from province to 64 established. This could consist of well- atthefederallevel. decentralization is unlikely to all districts) and horizontal distribution 60 61 57 known .scal economists and retired deliver the expected bene.ts. (among the districts). However, this system 54 55 .nance and/or revenue division wasdiscontinuedin2007-08. 50 51 After the 18th amendment, social Clear assignment of 48 49 secretaries, preferably representing each 40 45 44 province. The purpose of this commission sector responsibility has shifted to responsibilities at the federal, It was expected that the 18th amendment 40 41 39 42 would be to conduct research pertaining provinces. With the bulk of provincial as well as local levels are would spur a new life into the local 30 to inter-provincial .scal relations, to resources transferred to provinces, needed to strengthen government owing to addition of Article 20 32 monitor the province-speci.c .scal 140A in the constitution, which devolved there were expectations that accountability of policy makers reforms programs, and to ensure service political, administrative and .nancial 10 social indicators of provinces as and those responsible to deliver delivery in each province. 75 percent of the responsibility and authority to the elected 0 divisible pool can be released to the well as overall for Pakistan would underdecentralization. representatives of the local governments provinces without linking it to the improve signi.cantly. in each province. This amendment to the performance of monitored .scal reform constitution aimed to give due status to local governments. However, the progress on this front has been rather slow. Even after a period of .ve years, only two Punjab Sindh Khyber Balochistan Pakistan provinces have held elections of local Pakhtunkhwa governments. Devolution of political, 2001-02 2007-08 2013-14 1. Fiscalde.citnumbersfortheyear2013-14and2014-15arenotcomparablewithpreviousyearsowingtochangesinde.nitionofrevenue,expenditureand.scalde.cit. administrative and .nancial responsibility 2. IMF(2012),“Pakistan:2011ArticleIVConsultationandProposalforPost-ProgramMonitoring”,Washington,D.C.,InternationalMonetaryFund. andauthorityisstillafarreality. Source: Pakistan Social and Living Standards Measurement Survey (various years) 3. Khan,AshfaqueH.(2014),“ProjectingUnrealisticBudgetaryTargets” ,DevelopmentAdvocatePakistan,Vol.1,Issue3,October,UNDP,Pakistan. 4. Davis,J.,RolandoOssowski,ThomasRichardson,andStevenBarnett(2000),“FiscalandMacroeconomicImpactofPrivatization” OccasionalPaper194,Washington,D.C.,InternationalMonetaryFund. signi.cant progress during 2001-02 to in gender equality in primary enrollments 5. InstituteforPolicyReforms(2015),StateoftheEconomyin2014-15,Lahore:InstituteforPolicyReforms,June WhyLocalGovernmentsMatter 2007-08 when the NER increased from a (Chart2). 6. MinistryofFinance(2011),FederalBudget:BudgetinBrief2011-12,Islamabad:GovernmentofPakistan. Fiscal decentralization is a major agenda meager 42 percent to 55 percent, over a item of development policy in several periodofsixyears.Thereafter,during2007- developing countries. There is an 20 21 Opinion

Chart 2: Trend in Gender Parity Index Primary (%) 100 90 9089 86 7th NFC-Constitutional and Legal 80 82 83 83 79 76 70 75 74 60 67 67 importance 50 58 57 59 40

30 provinces) on the horizontal formula for (the province is an only net gainer in 20 interprovincial redistribution of their relative terms due to changes in the combined share from the federal divisible horizontal formula indicators) and Khyber 10 taxpool. Pakhtunkhwa–the two most 0 underdeveloped provinces. Punjab and The historic 7th award brought about Sindh did not lose either–at least not in crucial changes in the resource-sharing absolute terms. It makes the award a .scal formula both vertically and horizontally. equalizer. These changes have had substantial .nancial impact on both the centre and The award successfully and substantially the provinces. For example, it increases the changed the design of the resource Punjab Sindh Khyber Balochistan Pakistan size of divisible funds for the provinces, distribution mechanism by allocating a Pakhtunkhwa raises their collective share from the tax higher share in the .nancial resources to pool and changes the formula used for the provinces. This was done in view of the 2001-02 2007-08 2013-14 Nasir Jamal interprovincial resource distribution to fact that provincial governments are Source: Pakistan Social and Living Standards Measurement Survey (various years) tackle the most contentious issue between 'closer to the citizens and largely Journalist and Chief Reporter them. Not only that, the 7th award made responsible for .nancing public service DAWN Newspaper the mechanism of federal .scal transfers delivery'. But it has not been able to attain A similar trend is visible in child population, backwardness, tax much more transparent and less the targeted level of development. Several immunization. Pakistan made signi.cant effort/collection and performance. Khyber discretionarythanbefore. factors are blamed for the 'shortfall' in the progress during 2001-02 to 2007-08 by Pakhtunkhwa's .rst PFC had population social sector development target over the ntergovernmental .scal transfers are a increasing the coverage of fully and backwardness, and development A special effort was made to compensate life of the award expiring on June 30 this crucial feature of public .nance immunized children from 53 to 73 percent. incentive/infrastructure de.ciency as Khyber Pakhtunkhwa for the losses to its year. structure in any federal system of Province-wise trend reveals that this distribution criteria. Finally, Balochistan's I economy and infrastructure owing to the government.The transfers 'correct' vertical increase was due to an improvement in all .rst PFC award used population and area war on terror during the life of the award. and horizontal .nancial imbalances in a four provinces, in particular the progress as the distribution criteria. While, these Similarly, Balochistan's needs for its system where federal or central During negotiations on the award, it made in Balochistan is commendable. formulas were revised in the next PFC development were recognized and its governments are responsible for was assumed that the federal and However, after 2007-08, this trend awards, they had elements of share, as a percent of the collective collectingthebulkoftaxrevenues. provincial governments would work changed. While Punjab and Khyber backwardness or deprivation, which made provincial share, was enhanced to over to raise the tax-to-GDP (gross Pakhtunkhwa show further progress of 10 resource distribution more equitable. In ninepercent. and one percent in child immunization, this way, PFCs worked as a tool for inclusive In Pakistan, such transfers are made domestic product) ratio from nine to vertically between the central 15 percent. That meant that the the percentage of fully immunized developmentinPakistan. In addition to reforming the vertical and government and the provinces, and federal government would still have children in Balochistan and Sindh declined horizontal share of the tax divisible pool, horizontally among provinces through the more than adequate resources to by16andsixpercentrespectively. TheWay Forward the award also recognized the provinces' constitutionally mandated mechanism of .nance its functions despite a right on the provincial general sales tax the National Finance Commission (NFC). reduction in its share from the Salient Features of Provincial After the discontinuation of seven (GST) on services. Mechanisms for other Article 160 of the 1973 Constitution divisible pool in relative terms. At the FinanceCommission(PFC)Awards to eight years, it is expected that straight transfers such as net hydel pro.ts requires the commission to be set up every same time, it was assumed that the The aforementioned examples can be local government elections in all and surcharge on gas were also improved .ve years to give an award for sharing the provinces would receive signi.cant used to highlight the positive contribution provinces would be completed this to further bene.t the smaller provinces. net proceeds of the federal divisible tax funds to improve the quality of of local governments. One of the key year and the process of .scal The decisions made in the 7th award have pool,bothverticallyandhorizontally. public services and bring them contributors in the successes of local decentralization will commence been constitutionally protected through closer to the people. That did not government is the .nancial autonomy, again as per the spirit of the the 18th amendment, which was passed It is a hard and long road of negotiations happen. The federal government which was designated through PFCs. constitution.The.scalautonomyof by the parliament months after the for both the federal and provincial failed to increase its tax collection These PFCs have transparent and the local government requires well agreement on the present award. Besides governments in order to attain a according to the projections of the equitable resource distribution functioning PFCs, which can use devolving most federal functions to the favourable deal. Consequently, the award. Although the provinces have mechanisms. PFCs have created many transparent multiple criteria similar provinces, the 18th amendment also formulation of a consensus award has substantially increased their tax opportunities for inclusive development to the past for horizontal protects the provincial share from the always remained a challenge. Before the revenues over the last .ve years, through promoting gender equality, distribution. A variety of choices are divisible pool determined in the award. In conclusion of the 7th NFC award in mainly because of the transfer of GST poverty reduction and other development available for the indicators of addition, it allows them to borrow from December 2009, only three out of the six on services, they have failed to objectives. PFC grants systems were based backwardness/ deprivation both domestic and international sources, commissions formed since 1974, could effectively tax income from on multiple criteria that varied among the including the SPDC deprivation subjecttofederalpermission. conclude their proceedings and give agriculture and property. In reality, provinces. In case of Punjab, factors of index and the Multiple Poverty consensus-based awards. Some tough the tax-to-GDP ratio dropped to 9.19 population and backwardness were used Index of UNDP. Both the indicators According to various studies on the impact bargainingisexpectedinthefuture. percent in the .rst four years of the in the .rst PFC award for horizontal are available for all districts of of the 7th NFC award on the federation and award, from 9.39 percent during the distribution of resources. Sindh's .rst PFC Pakistan and are based on the provinces, all these changes The lack of consensus can be attributed fouryearsprecedingits.nalization. governmentdata. disproportionately favoured Balochistan award had four criteria including majorly to the differences (between the 22 23 Opinion

Much of the .scal space allowed in the attention by the NFC pertains to the heavy horizontal distribution of funds should be award to the provinces for increasing their reliance of the provinces on federal re.ned to ensure the most social sector expenditure was immediately transfers. The new award should .nd ways underdeveloped provinces obtain greater squeezed by the federal government and means to encourage the provinces to accesstofederalfunds. 7th NFC Award: Is there any through a 50 percent spike in the salaries reduce their dependence on proceeds and pension of government employees in from the divisible pool by raising their own The next award must also tackle issues that its .rst year, 2010-11. Consequently, the taxes. Some targets and incentives for the cropped up after the .nalization of the 7th non-development expenditure of the provincial .scal efforts can be agreed award. The foremost among them is impact? provinces and the centre spiked upon. For example, the weight assigned to related to the cost of functions devolved signi.cantly faster at the cost of tax collection and generation in the under the 18th amendment that development investment. Subsequently, horizontal formula can be increased. Also, decentralize several federal functions to the yearly raise given to government the task of imposing and collecting the province. Such functions include the employees further increased the burden income tax on agriculture can be vertical healthcare programme which the expenditure, on the other hand, has development indicators by creating social ontheprovincialresources. transferred to the centre and GST on goods provinces have declined to accept unless increased by 16.4 percent against the capital, improving basic social services to the provinces to enhance their revenues the federal government also transfers projectionof14percent. that are considered a basic human right The provincial governments were forced and to encourage the manufacturing allocations for it. Since such programmes and reducing poverty that ultimately leads to impose further cuts on their industryintheirrespectiveareas. have a direct bearing on the quality of life Besides some increase in the social sector towards socio-political stability in a development spending when the federal of the public, there is a great urgency for spending by provinces, transfer of new society. budget de.cit surged to over eight Second, the provincial governments thenewawardto.ndasolutiontothis. subjects has also put an additional burden percent of the GDP in 2012-13, owing to should be given speci.c development on their resources. With the passage of the Ultimately, it is not the spending but the unbridled spending on energy subsidies targets in the social sector with their Then there are issues such as the federal 18th amendment, 47 subjects of the results that will matter to judge the social and other rising non-development performance monitored. This is to ensure government's .scal problems and its loan erstwhile concurrent list were devolved to sector performance. This injection of expenditure . Islamabad was forced to that they use the .scal space provided by agreement with the IMF.Most importantly, the provinces. Transfer of these subjects additional resources cannot be rejoiced if knock at the door of the International the increased share from the divisible pool, at the instance of the IMF, the federation entails an additional hefty salary & pension key human development indicators do not Monetary Fund (IMF) for a bailout package. for improving the quality of public service puts pressure on the provinces to produce bill, development of infrastructure of the register some visible improvement. An One of the conditions of the IMF package delivery. budget surpluses. This shrouds the devolved departments and expenditure example is a decline in the overall literacy demanded that the provinces balanced provinces' capacity to increase Naseer Memon on operation, maintenance and rate of Pakistan. According to the latest their budgets and produced surpluses to Third, the provincial governments should development investment and is against procurements. In other words, the impact report of the Pakistan Social and Living help cut the consolidated .scal de.cit. In be bound to set up provincial .nance thespiritoftheNFCaward. Chief Executive of higher spending in the social sector has Standards Measurement (PSLM) survey, 2013-14, the provinces produced a budget commissions (PFCs) and share the Strengthening Participatory been mostly offset by the new burden of Pakistan's literacy rate has slipped from 60 surplus of 0.59 percent of the GDP against development funds with the local Also unfair is the 'encroachment' of Organization (SPO) expenditures. percent in 2012-13, to 58 percent in 2013- theNFCprojectionof0.12percent. governments to ensure more effective and provincial territory by the federal 14. Higher spending, it seems, could not better utilization of funds according to the government in the matter of taxation. The But it is not only about development yield desired results. Spending is very Expected to be delivered before the end of actual needs of the people.The purpose of federal government treats several expenditures, one should also look at the important, yet just one of the variables. the next .nancial year, the 8th award must both the 7th NFC and the 18th provincial services as goods and has he 7th National Finance Commission impact of it on the lives of the citizens. Other critical factors such as population '.ne tune and re.ne' the provisions of the amendment was to devolve power-both imposed tax in excise duty mode. This Award (NFCA) marked a major policy Within overall development budgets, growth and investing resources at the present award and resolve the issues administrative and .nancial-to the stallstheprovincial.scaleffort. Tshift that attempted to enhance spending on social sector avenues is of right place in an effective manner are of arising after the passage of the 18th grassroots. That objective cannot be provincial share in the vertical distribution critical importance. It directly contributes equalimportance. amendment to ensure that common achieved without the effective It is expected that the next award will pick and diversify the distribution criterion for towards the improvement of human people receive the development bene.ts involvement of the local tiers of the the thread from where the present award the horizontal distribution of resources. thathadbeenpromised. governmentinthedevelopmentactivity. had left and deepen the .scal and Additionally, the federal government Pakistan’s status is off-track on most MDGs indicators before and after the NFC. administrative devolution effort to the reduced its tax collection charges The following table provides a summary of the situation. One area that requires immediate Fourth, the formula for interprovincial or locallevelstartedbythe18thamendment. substantially from .ve to one percent. The net impact has been signi.cant increases MDG indicators Pre-NFC status* Post-NFC status** in the overall share of the provinces in the divisible pool. Some analysisp uts this Goal 1: Eradicate Extreme 3/3 indicators off track 2/3 indicators off track increase at Rs. 1228 billion when Poverty and Hunger compared to the 6th NFCA. Province wise, Goal 2: Achieve Universal Punjab was expected to get Rs. 320 billion, 3/3 indicators off track 3/3 indicators off track Primary Education Balochistan Rs. 319 billion, Sindh Rs. 290 billion and Khyber Pakhtunkhwa (KP) Rs. Goal 3: Promote gender 307 billion. The actual provincial receipts, equality and women's 5/5 indicators off track 4/5 indicators off track however, fell below the projected share empowerment due to a shortfall in revenue collections against the projections done in the base Goal 4: Reduce Child 5/6 indicators off track 5/6 indicators off track year2009/10. Mortality

It was expected that the increased Goal 5: Improve Maternal 5/5 indicators off track 4/5 indicators off track allocation would result in enhanced social Health sector expenditures at the provincial level which has occurred, but not as projected. Goal 6: Combat HIV/AIDS, 4/5 indicators off track 3/5 indicators off track In the post 7th NFCA period, the provincial Malaria and Other Diseases development expenditure has increased by 13.6 percent against the NFC Goal 7: Ensuring 5/7 indicators off track 3/7 indicators off track projections of 36.9 percent. The current environmental sustainability

*Based mostly on PSLM data for 2008-09 and 2009-10 **Based mostly on PSLM data for 2011-12 and 2013-14 (subject to availability)

1. PolicypaperNo.25,SocialPolicyandDevelopmentCentre,Karachi 24 25 Opinion

governments to share resources in the delivery of services on accounts of these light of their functional mandates. new functions. The award needs to create The Perspective of Development Partners Consequently, the .nancing of devolved space for responsible provincial functions to provinces is still a contentious governments that have good .scal rules in issue and is holding back the bene.ts of place to borrow for their development. the 18th amendment. Incentives are in This would help them overcome their on the 7th NFC and the Way Forward place for the federal government to stop infrastructure .nancing gap and provide funding vertical programmes of the health better services to citizens. Similarly, use of sector after 2014-15, as decided by the factors like 'poverty' and 'revenue' in Council of Common Interests (CCI) a few horizontal distribution need be years ago. On the other hand, provinces appropriate. The 'poverty' factor must may not be willing to take up these costs provide resources to the provinces in equalization between the provinces, when resources, which was not the case. An unless they are provided additional accordance with their share Punjab moved away from its traditional example of the outcome is the one percent resources by the federal government. corresponding to actual poverty statistics. stance of horizontal distribution on the allocated to Khyber Pakhtunkhwa on These vertical programmes deal with This will help improve targeting of basis of population and allowed inclusion account of the war on terror. Due to the important services of primary health such resources to alleviate poverty. The of 'inverse population density', 'revenue' absence of an accountability mechanism, as family planning, mother & child health, 'revenue' factor should reward provinces and 'poverty' to the formula. Three there is no guarantee that these funds immunization,TB control etc. If things pan for their performance in own source provinces also agreed to reduce their were actually utilized for the intended out as feared above, we may see a revenue. Most importantly, it is imperative horizontal share by two percentage points purpose. disruption in these important services to that all stakeholders unite to increase the toincreasetheshareoftheBalochistan. thecitizens. 'size of the cake' i.e. to increase the tax-to- In addition, some variables were not dealt GDP ratio of the country. Unless this In short, the Award was a good example of with well in the award. For instance, in the While the 7th NFC Award did create a spirit happens, no distribution formula will be sacri.ce and accommodation. But was it a case of 'revenue',provinces were rewarded of accommodation and sacri.ce, it is abletoshapePakistan'sdestiny. good transfer system i.e. did it meet the based solely on their past contribution to integral that the next award goes beyond criteria for a good transfer system? Did it the national revenue and these shares this to create incentives for better .scal Faisal Rashid create incentives for good .scal behavior were .xed for the life of the award. A better behavious by all governments. It must also i.e. revenue mobilization including the strategy would have been to reward own try to resolve issues of funding of devolved functions so that provinces can fully focus Public Financial Management Advisor revenue-to-GDP ratio and expenditure source tax collection by provinces by DFID assisted Subnational Governance efficiency? We will try to analyze the 7th offering a matching grant to the provinces. Programme NFCAwardbasedonthiscriteria. It would have helped increase the country's tax-to-GDP ratio and created Transfer systems are based on the incentivesforgood.scalbehavior. he 7th NFC Award and 18th principles of adequacy, budgetary Constitutional Amendment are autonomy, equity, predictability, The award also endeavored to increase the Timportant landmarks of .scal simplicity & transparency. Sufficient revenue-to-GDP ratio by 15 percent. This federalism in Pakistan. By devolving resources for service delivery need to be objective was to be attained by an greater resources to the provinces, they provided to the provinces, with minimum increased collection of taxes that would be allowed citizens to become empowered in conditions placed on provincial budgetary directly proportional to an increase in attaining easier access to resources and autonomy, along with the establishment revenue. However, as this provision was authority. of a transparent and predictable .scal not binding, hence, it failed to receive transfer system that is imperative to ensure much attention by the governments. As a The award promised success at two levels: adequacy. result, widespread dissatisfaction from the national and the provincial. At the public sector delivery was observed, with national level, the federal government While computing the aforementioned citizens unwilling to pay taxes. It would be agreed to reduce collection cost (charged conditions with the 7th NFC Award, it important that while deciding the next by it) from 5.2 percent on average to just appears that adequacy, including award we develop a mechanism that one percent, to enlarge the size of the provincial budgetary autonomy, have would ensure maximum revenue effort by divisible pool of taxes. This resulted in an been ful.lled by the Award. The Award allgovernments. increase in the share of provinces from increased provincial resources by one approximately 46.25 percent of the percent of GDP per annum and did not put The 7th NFC also allowed provinces to divisible pool in 2009-10 to 56 percent in undue restrictions on provincial collect sales tax directly, whilst previously, 2010-11 (and 57.5 percent thereafter). The government's pursuit for efficiency or this collection was being done by the provinces were given the sole right to tax provincial priorities. Similarly, it seemed to federal government. Ideally a tax like sales on services and collection and Khyber meet the requirements of 'predictability' tax on services, involving cross province PakhtunkhwawasallottedRs.110billionin and 'simplicity and transparency' because transactions, should not be collected by lieu of its claim of net-hydel pro.t along of being a formula based on a few provinces as it raises risks of tax exporting with one percent share from the divisible variables. Apparently, it also seemed to and double taxation that has resulted in pool as resources to deal with the effects of have increased .scal equalization among inter-jurisdiction and inter-tax issues. This the war on terror, whilst Balochistan was provinces by inclusion of factors such as arrangement also elevated business costs aided in the initiation of a large 'Aghaz-e- 'inverse population density', 'poverty' and as taxpayers now have to .le multiple tax haqooq-e-Balochistan' package. Federal & 'revenue' as the basis for horizontal returns and deal with multiple tax provincial governments also agreed to distribution as a result of which small and agencies. take measures to increase the tax-to-GDP relatively backward provinces received ratio to 15 percent by the terminal year of more resources. However, in order to A solution to several of the 0aws in the 7th the7thNFC. ensure an adequate transfer system, a NFC could have been that it should have mechanism needs to be put into place in come after the 18th amendment. This The award also infused the spirit of greater order to ensure effective utilization of would have allowed federal & provincial

26 27 Interview Interview

say that again say that again

“...if we can mobilize higher resources, the size of the “pie” increases, hence leading “...fiscal discipline and effort, should be to a win/win situation for all federating awarded in the NFC awards” units.”

Dr. Ayesha Ghaus Pasha Dr. Hafeez Ahmed Pasha Provincial nominee for NFC - Punjab Distinguished Economist and Chairman, Panel of Economists Was the 7th NFC award adequate (in terms of provincial (Independent advisory committee for the government) share) for the socio-economic development of the province?

Some very important developments have taken place since the Wasthe7thNFCawardadequate(intermsofprovincialshare) because they are at a very real risk of starving out before they even 7th NFC award.The last NFC predates the 18th amendment, which forthesocio-economicdevelopmentoftheprovinces? take shape. Elections have already happened in the two smaller enhances the provincial functional responsibility and changes provinces, and the need of the hour is to revert to the Musharraf provincial dynamics considerably, and as such, the provinces have A good step forward via the 7th NFC was that the vertical order of 2006. Under this step, 1/6th of the sales tax must revert to to be compensated accordingly. There has also been a major allocation was raised to 57.5 percent. As a result, provinces the local government. Without this mandatory transfer, the local change in the security perspective. Security efforts are now roughly gained Rs. 200 billion, which is about one percent of the governments will simply not survive. This is step one. All other focused in multiple areas; the related expenses are much greater, GDP. This was a very substantial increase in transfers to the considerations,includingPFCs,aresecond. especially under the National Action Plan. And providing security provinces. Additionally, there was a certain degree of .scal for our citizens is pivotal to our economic development and our equalization, as the horizontal criteria moved beyond the relative Do you think the NFC process should cover the three economic growth. Punjab will be hoping for an enhancement in populations of the four provinces. Of course, as a result, the administrativeregions(FATA,GB,AJK)?Whyorwhynot? revenuetransfers. smaller provinces of Balochistan and Khyber Pukhtunkhwa bene.ted, while Punjab lost out. However, even then, Punjab From a provincial standpoint, the inclusion of these three regions Do you think the divisible pool should be broadened? If yes, receivedmorethanitdidinthepreviousaward. in the NFC does not present a favourable situation. The inclusion whataretheoptions? of these regions will mean that the provincial allocation of the 57.5 Do you think the divisible pool should be broadened? If yes, percent of the vertical share will have to be further divided to The divisible pool consists of the taxes collected by the federal whataretheoptions? includethethreenewregions. government. In order to broaden it, the federal government will have to take necessary measures for higher resource mobilization The problem is that the 18th amendment came post the 7th NFC through the Federal Bureau of Revenue. If we can mobilize higher Chaudhry Abdul Majid award. There are a number of functions that have not been resources, the size of the “pie” increases, hence leading to a transferred to the provinces and certain big ticket items that have win/win situation for all federating units. The other way to Prime Minister - Azad Jammu and Kashmir not been accounted for. That being said, as of now, the share is broaden the divisible pool is to bring more revenue sources in it. quitelarge,andshouldstaywhereitis. There still are some revenue sources which do not currently fall in thedivisiblepool. Do you think the NFC process should cover the What changes would you like for the 8th NFC in terms of the three administrative regions (FATA, GB, AJK)?Why vertical and horizontal distribution criteria of the divisible What changes would you like for the 8th NFC in terms of the orwhynot? pool? vertical and horizontal distribution criteria of the divisible pool? Constitutionally, Kashmir is not a part of Pakistan, but There should be more provisions in the horizontal criteria. After it is administered by Pakistan. It does not have a the last award, the provinces went on a binge of spending by Revisions are definitely required. The vertical share has to be special status that would place it parallel with other increasing salaries. Meanwhile, development spending did enhanced. Likewise, the horizontal distribution criteria has a lot of provinces. Till date, the budget for all development in0ate, primarily because of a lack of capacity, particularly in the room for improvement. Punjab has been very accommodative of projects has been supplied by the government. Being smaller provinces. With this limited capacity to mobilize .scal the other provinces in the 7th NFC award and we are hoping this made a part of the NFC will enable an increased funds resources,thedevelopmentportfolioshavesuffered. time that other provinces will reciprocate. Also, the tax to GDP allocation to Kashmir which in turn can be effectively ratio in Pakistan is very low, and improving this ratio is essential as utilized in development projects. Therefore, this will To cut a long story short, .scal discipline and effort, should be more funds are needed to finance our efforts towards the provetobeverybene.cialfor Kashmiranditspeople. awarded in the NFC awards. This is the model that India employs bettermentofthepeople,toimproveservicedelivery,tostimulate and we can learn from it to improve our own framework. The growthandthusimprovethequalityoflifeforPakistanis. provincial share in the tax revenue is seven percent, and the 7th NFC stated a commitment to improve tax generation, especially Don't you think there is a need for a criteria based provincial on agriculture and real estate. It has failed to do so. Now, there finance commission award (PFC) on the pattern of the NFC? thinkwewillunveilthePFCforumsoon. must be incentives to ensure a better, more holistic and more Hasyourprovincedoneanythinginthisregard? streamlinedhorizontalcriteria. Do you think the NFC process should cover the three Most definitely. The lower tier must have proper funding through administrativeregions(FATA,GB,AJK)?Whyorwhynot? Do you think there is a need for a criteria based provincial provincial finance commissions. This is absolutely essential and .nancecommissionaward(PFC)onthepatternoftheNFC? the mechanism must be transparent, non-discretionary, non- Under Article 160 of the Constitution, the NFC applies to the discriminatoryandclear.PunjabisalreadyworkingonitandI federation and the four provincial administrative areas. FATA, GB First and foremost, funds must be provided to local governments, andAJKarethefederalgovernment'sresponsibility.

28 29 Interview Interview

say that again Finally, changes in horizontal distribution criteria are also required. The share for distribution on the basis of population “...the Bureaucracy must stop exploiting should be decreased from the present 82 percent. A new head of the rest for their vested interests and work 'Lag in Infrastructure/Investment' should be introduced under together in not letting history repeat which at least 10 percent share should be speci.ed. Likewise, itself.” 'Income Difference' should also be introduced along with the 'Poverty and Backwardness' agenda and the share for it should be .xed at 15 percent.The need is for an immediate holding of census toredrawtheratioofpopulation. Dr. Jehanzeb Jamaldini Muzaffar Said Senator - Balochistan Finance Minister - Khyber Pakhtunkhwa

Wasthe7thNFCawardadequate(intermsofprovincialshare) interestsandworktogetherinnotlettinghistoryrepeatitself. Was the vertical and horizontal distribution criteria forthesocio-economicdevelopmentoftheprovince? adequate?Whatadjustmentsareneeded? Don't you think there is a need for a criteria based provincial Unfortunately, the passing of the 7th NFC award did not bring .nance commission award (PFC) on the pattern of the NFC? No, the vertical and horizontal distribution criteria was not about the expected socio economic reforms in the provinces. Hasyourprovincedoneanythinginthisregard? adequate. The vertical share between the federation and the Balochistan being the most affected and deprived province, provinces needs to be revisited in view of the 18th amendment. suffered most by being the recipient with the least amount of Balochistan's contribution to the national exchequer is signi.cant. The share of the provinces should be increased to 80 percent and share allocated. Punjab was the major bene.ciary, although it Projects such as Saindak, Rekodig and Chamalang among others, that of the Center decreased to 20 percent. The federal divisible re0ected its image as being otherwise, with Sindh and Balochistan create a huge chunk of amount for the national kitty. The Sui area pool should also be broadened. Currently, income tax, custom followingafter. has been supplying the country with natural gas. It is high time dutiesandgeneralsalestaxhasbeenincludedinthedivisiblepool that the federation realizes the signi.cance of the province and while several items have been neglected. All these items should According to the distribution formula, the allocation of funds was developsaPFCaward. be made a part of the divisible pool. Recently, the federal 10.3 percent poverty based and .ve percent revenue based. This government announced plans of including FATA, Gilgit-Baltistan Mir Khalid Langove and Azad Kashmir into the NFC process.These regions are already gaveanedgetoPunjabandSindhwhoclaimedthatpovertylevels Do you think the NFC process should cover the three Advisor to Chief Minister on Finance werehighestinthem. administrativeregions(FATA,GB,AJK)?Whyorwhynot? administered by the federal government and hence, they should have funds allocated from its share. They should not be deemed Balochistan In revenue generation, all three provinces were allocated .ve equal to the federating units to in0ict further cut on the share of The Balochistan National Party (BNP) believes that no area in In the 7th NFC award, was the vertical and horizontal percentshareinfederalfunds,whileBalochistanreceivednone. Pakistan should be deprived of development and funds. the provinces in the NFC. Owing to major losses incurred due to distribution criteria adequate? What adjustments are Therefore, the NFC should indeed cover these three terrorism, Khyber Pakhtunkhwa's current share of one percent for needed? The case for Balochistan's share in the 7th NFC was weak and the administrative regions in order to boost their socioeconomic damages caused by terrorism, needs to be increased to at least representatives were unable to defend it effectively enough to conditions. threepercent. yield bene.cial results. Though the province covers 43.6 percent While the 7th NFC proved bene.cial for Balochistan in terms of the country area, yet the distribution of funds narrates a Khyber Pakhtunkhwa's share in the net-hydel pro.t also needs to of funds allocation, the province has always been urging for a differentstoryaltogether. be uncapped via the NFC.The share was capped in 1991 at Rupees shift in the distribution formula owing to several issues that six billion.With the increase in the currency value of the dollar, this haveplaguedtheprovince. Do you think the divisible pool should be broadened? If yes, share should increase simultaneously. The province is also The 8th NFC appears to be in the process of .nalization, whataretheoptions? attributed minimum share in revenue collection, though immense contributions in import emerge from Khyber however, no consensus has been reached by the members of thecommissionasyet. There is a dire need for enhancing the divisible pool if any hope is Pakhtunkhwa. The collection of all revenues takes place at the to be expected in the future. If the current allocation criteria is Karachi Port when consumers belong to our province as well. According to the 7th NFC, the distribution formula was maintained, little can be done to improve education, health and Either a proportionate share in custom duties should be given to based largely on population, standing at 82 percent, whilst other sectors in the province. The solution lies in the federation us or we should be allowed to collect the duties at the entry points other factors of poverty, revenue etc. just constituted 18 reducing its share and reallocating it towards the provinces for a of our province. Why should these duties on goods meant for our percent of the formula. This is unfair, especially because bettermanagementofissuesbytheprovincialgovernments. province be collected in Karachi? This would be one method of increasingourshareintherevenuecollection. Balochistan occupies 43.6 percent of the country area and has to bear huge costs of infrastructure along with the Q)What changes would you like for the 8th NFC in terms of the provision of other facilities when compared to the rest of the vertical and horizontal distribution criteria of the divisible Crude oil is also produced in large quantities in the province. The country. Furthermore, according to the latest report of the pool? total oil production in the country amounts to 80,000 barrels of which Khyber Pakhtunkhwa produces half. The implementation Benazir Income Support Programme, Balochistan harbours of excise duty on crude oil was a suggestion we put forth. There the highest rate of poverty. If we recall, Khyber Pakhtunkhwa The 8th NFC needs to massively amend and improve the present was also allotted additional funds for its acute poverty level verticalandhorizontalcriteria. needs to be judicious distribution of the Public Sector Development Programme (PSDP) as well. Our province has in the 7th NFC. Based on these two factors, Balochistan should be allotted an increase in the allocation of funds, from The distribution of funds should be made on the basis of area. suffered complete neglect in the PSDP and funds for approved projectshavenotbeenreleasedeither. 9.09 to 20 percent. In addition, Balochistan should also be Allocation of funds on the basis of poverty should be reduced attributed a 'protection of projection' in the 8th NFC as it was from10.3tothreepercentwhilstareashouldbe10percent. We have also demanded special grants for the province for energy in the 7th NFC. In light of the above, the province demands a review of the NFC award formula and suggests that the One must not forget the example that history quotes, when projects. Energy is a major need of the country and Khyber Pakhtunkhwa is an energy producing hub. In order to utilize the federation should decrease its share and instead, distribute Pakistan lost East Pakistan as they were not allocated share on the moretotheprovinces. basis of area. Balochistan today, has similar demands. The province's energy producing capacities and help overcome the Bureaucracy must stop exploiting the rest for their vested country's energy crisis, we should be encouraged to initiate energyprojects.

30 31 Interview Interview

say that again

“...the vertical distribution criteria needs to be revisited now with an objective to increase the share of the provinces.”

Ch. Muhammad Berjees Tahir Akhunzada Chitan Sikandar Khan Sherpao Federal Minister - Kashmir affairs and Gilgit Baltistan Central leader of FATA joint political Provincial President and parliamentary leader of Qaumi Watan Party parties and member of FATA reforms committee Khyber Pakhtunkhwa Assembly

Wasthe7thNFCawardadequate(intermsofprovincialshare) regard, although the Local Government Act 2014 does mention Do you think the NFC process should cover the three administrative regions (FATA, GB, AJK)? Why or why not? forthesocio-economicdevelopmentoftheprovince? the presence of a PFC. However, words have not taken any action as yet. The past has seen a neglect in the distribution of resources One major change brought about by the 7th NFC was the change and development funds for some provinces. Had there been a in the formula for horizontal distribution. Prior to this, distribution judicious distribution of funds, the voice for a separate province in The basic framework for the distribution of revenues between the Despite being the most deprived region in the country, FATAbears was solely based on population, which made Punjab the major somedistricts,wouldnothavearose. federation and the provinces is governed by part VI chapter 1, of no representation in the NFC and this is one of the major reasons bene.ciary. However, the 7th NFC rede.ned that formula, the Constitution of Pakistan. The establishment of the National for the huge prevalence of poverty in the area. For a long time, the according to which, resources were distributed on the basis of Do you think the NFC process should cover the three Finance Commission (NFC) is outlined in Article 160, according to .nancial needs of the region have been ignored, resulting in backwardness, revenue collection and inverse population administrativeregions(FATA,GB,AJK)?Whyorwhynot? which the NFC has to make the following periodic alarming situations in the region, including terrorism, unstable density,alongwithpopulation.Thiswasindeedapositivechange. recommendationstothePresident: law and order situation and a sense of deprivation among the The current NFC will face a major issue in this regard. The a. The distribution ratio between the federation and the community.Despitethefactthatlocalbodyelectionsaretheneed The 18th amendment was ready to be enacted by the time the 7th federation may use this reason to enhance its share. However, if provinces of the net proceeds of the taxes mentioned in ofthehour,yettheyarebeingheldthroughoutthecountryexcept NFC was announced. The 18th amendment was going to devolve the federation really desires for a fair distribution of resources, clause(3); for the area that requires them the most. Moreover, FATA has not several departments to the provinces and thus the share of the then these three regions should be made part of the NFC, with b. The making of grants-in-aid by the federal government been granted a right of legislation and any legislations passed in provinces should have been increased. I still believe that the share their funds being provided from the share of the federation and totheprovincialgovernments; the parliament are not applicable to the region. All these issues are needs to be increased. History is witness to the fact that the ratio of notthatoftheprovinces. c. The exercise by the federal Government and the being 0outed as the media is not showcasing them. In fact, the vertical distribution between the provinces and the federation provincial governments of the borrowing powers, media is also not free in FATA and reporters/journalists have to was 80:20 percent respectively. It was in 1996, when a caretaker conferredbytheConstitution;and acquire special permissions from the military and civil officials government reversed the process to increase the share of the d. Any other matter relating to .nance referred to the before they can enter the region. How will the situation improve in federation and decrease that of the provinces. This was not fair. CommissionbythePresident. theregionwhenFATAvoicesarenotbeingheard? The vertical distribution criteria needs to be revisited now with an objectivetoincreasetheshareoftheprovinces. Gilgit Baltistan (GB) is a part of Kashmir and the Kashmir issue The region also faces problems of funds, both national or remains unresolved till date, pending before the United Nations international, reaching tribesmen at the grass root level. The Do you think the divisible pool should be broadened? If yes, since the past several decades. Although it would be extremely officials responsible for funds distribution absorb the funds within whataretheoptions? bene.cial to extend the NFC to GB, but until the Kashmir issue is themselves at times, as a result of which little or no funds actually resolved, doing this would be a complicated matter. Additionally, reach the ones for whom they are meant. There is a need for The federal divisible pool lacks several agendas that should be a constitutional amendment would be required for such a step to elected councilors to be trained and engaged so that there is a fair made a part of it. One such example is the housing of foreign aid takeeffect,inordertoavoidaviolationofthelaw. distribution of funds.The funds are meant for the local community keptwithintheirdomainbythefederalgovernment. anditsdevelopmentandhenceshouldrightfullyreachthem. As for FATA, the NFC can be extended to the region once it is What changes would you like for the 8th NFC in terms of the allocated the status of a constitutional province. Once this has Another major issue in FATA are the Temporary Displaced People takeneffect,ataxsystemneedstobeintroducedintheregion. (TDPs). This phenomena has severely impacted the infrastructure vertical and horizontal distribution criteria of the divisible and given birth to issues of rehabilitation. Currently, investigation pool? is also underway for the embezzlement fraud regarding the funds fortheTDPs. There should be an increase in the share of the provinces in the vertical distribution criteria. For the horizontal distribution FATA should be represented in the NFC. The region does not criteria, there is a dire need to reduce the dependence of demand a 'special' status. In fact, it demands to be treated like population, with the introduction of special incentives for energy other parts of Pakistan, being given the same law and similar producing provinces such as Khyber Pakhtunkhwa. Such rights. The Metro bus project has an investment worth seven incentives are important as energy is the basis for a strong billion rupees and in comparison, the total budget for FATA is 1.7 economy. billion rupees. The struggle for representation in the NFC is ongoing.There has also been a recommendation from all political Do you think there is a need for a criteria based provincial parties in FATA and tribal elders, that FATA should be given a .nance commission award (PFC) on the pattern of the NFC? council synonymous to the one that Gilgit Baltistan has, that holds Hasyourprovincedoneanythinginthisregard? the power of legislation. The council can then decide whether to merge in Khyber Pakhtunkhwa or work as an independent I am a strong advocate of the fact that there should be a PFC.This is province. integral to ensure the fair distribution of resources among various districts. However, the present marks a lack of homework in this

32 33 Interview Interview

say that again say that again

“...devolution on paper does not directly “...we want our rights. We do not want to and simply translate onto devolution in usurp others' rights, but we will not allow practice.” others to take away our share either. ”

Saleem Mandviwalla Prof. M Ibrahim Khan Provincial nominee for NFC - Sindh Provincial nominee for NFC - Khyber Pakhtunkhwa

Wasthe7thNFCawardadequate(intermsofprovincialshare) Don't you think there is a need for a criteria based provincial Wasthe7thNFCawardadequate(intermsofprovincialshare) when the share of the federation was 20 percent and that of the forthesocio-economicdevelopmentoftheprovince? .nance commission award (PFC) on the pattern of the NFC? forthesocio-economicdevelopmentoftheprovince? provinces was 80 percent. In 1996, the Center's share was Hasyourprovincedoneanythinginthisregard? increased to 62.5 percent and that of provinces to 37.5 percent. In It is not adequate and a lot of issues are not addressed. Under the The people of Khyber Pakhtunkhwa suffer from a sense of 2006 the federation's share was .xed at 55 percent and that of 18th amendment, certain chapters have been devolved into the That can also be looked at and certainly is a good idea. But it has to deprivation built on the fact that the province was not given its provinces at 45 percent. The current situation holds that the provinces, but the budget has not been allocated accordingly.The be contextual; you cannot base it off of the same formula as the due share in the 7th NFC award. After great struggle, the previous federation is getting 57.5 percent and provinces 42.5 percent. Post vertical share has to be adjusted to re0ect the devolution; there NFC. Practically, it will be difficult and has to be very carefully NFC attributed one percent of the federal divisible pool for the 18th amendment, several departments were devolved to the should have at least been a roadmap. Devolution on paper does formulated, but it is a good idea in principle. Most signi.cantly, like terrorism before distribution. But even that one percent share has provinces. Therefore, the share of the provinces in the federal notdirectlyandsimplytranslateontodevolutioninpractice. theNFC,itcannotbebasedonpopulation. notbeenprovidedtotheprovinceasyet. divisiblepoolshouldbeincreased.

Do you think the divisible pool should be broadened? If yes, Do you think the NFC process should cover the three The current situation is much aggravated owing to the damages Don't you think there is a need for a criteria based provincial whataretheoptions? administrativeregions(FATA,GB,AJK)?Whyorwhy? caused by the war against terrorism. In a scenario where the .nance commission award (PFC) on the pattern of the NFC? province is hosting hundreds of thousands of temporarily Hasyourprovincedoneanythinginthisregard? The government has kept many taxes as levies and they are not Yes it should as they are administrative units of Pakistan. But you displaced people from the Federally Administered Tribal Areas included in the divisible pool. Constitutionally, only taxes are part will need to change the administrative structures of these areas (FATA), one percent share is indeed very less and needs to be Currently, I do not possess accurate details regarding the matter of the divisible pool. Levies reduce the pool and it can subjectively beforetheycanbebroughtintothefold. increased to at least three percent. We previously insisted that the but the province does have a provincial .nance commission. To create issues. For example, as far as petroleum is concerned, that province should be given its due share of the net-hydel pro.t.The develop it on the framework of the NFC will be a complicated task has always remained a levy, but in my opinion it is a tax. amountthatwascappedatRs.six billionneedstobeuncapped. for the reason that while the NFC clearly de.nes the federation Additionally, revenue collection is done by provinces over and and federating units, attaining a similar clarity of de.ning units abovetheirtargets,andthatisnevercreditedproperly. The 10 percent annual increase in it as per the AGN Kazi Formula will be an uphill task at the provincial level. Based on the formula could not be made as well. In addition, owing to the delayed that districts are considered as units, the distribution of funds will What needs to happen is a broadening that will cover many payment by WAPDA, the increase in the share of the province pose a problem with the presence of 26 districts in the province. aspects and de.nitions of tax collection and bring reform into could not be given. There are reports that Punjab is not ready to However, a permanent body needs to be in place. But serious how the entire system is structured. No system in the world can sacri.ce but we do not want sacri.ce. We want our rights. We do thinkingandhomeworkisneededforthistotakeeffect. operatewithoutevolution;thistoo,mustevolve. not want to usurp others' rights, but we will not allow others to takeawayourshareeither. Do you think the NFC process should cover the three What changes would you like for the 8th NFC in terms of the administrativeregions(FATA,GB,AJK)?Whyorwhynot? vertical and horizontal distribution criteria of the divisible Do you think the divisible pool should be broadened? If yes, pool? whataretheoptions? According to the current terms of reference, the point to make these regions a part of the process has been raised. In principle, we Education and health have been devolved, but the percentages Yes, I think it should be broadened and formal work in this regard are ready that they should be covered in the NFC process.We are in have not been changed, which begs the question: how do has started. The .nance commission has started its proceedings. favour of giving them their due share, but not at the cost of the provinces create this additional revenue to properly fund and deal However, certain things such as the revenue generated from oil, provinces. They are part of the federation and the federal withdevolvedsubjects? gas and excise duties, are still not clear, when the terms of government should allot them funds from its share, considering reference of the NFC clearly state that such duties and other taxes thatthefederationreceivesahugechunkfromthedivisiblepool. The 7th NFC award should have been discussed again, after the may be speci.ed by the president. This needs to be explained. 18th amendment was passed, to ensure provinces received There needs to be transparency in the oil and gas production data. proper shares and that the percentages accounted for the The records should be made available to the .nance commission. amendment changes. This was not foreseen and not tackled Once the provinces' royalties are extracted, the revenue earned properly. should be made part of the divisible pool. Likewise, theft of oil from our oil .elds needs to be controlled and held accountable for. Finally, the bulk of the criteria are population-based, which is The new taxes introduced by the federal government from time to pedestrian at best. Several socio-economic factors are not time should be made part of the divisible pool. Also, the total considered, and this simplistic criterion makes it unfair for quantumofthedivisiblepoolshouldbemadepublic. provinces like Balochistan. Dr. Ishrat's comments from a few days ago about how tax effort should be added as a .fth criterion What changes would you like for the 8th NFC in terms of the shouldalsobeconsidered. vertical and horizontal distribution criteria of the divisible pool?

The share of the provinces should be increased. There was a time

34 35 Interview Interview

say that again say that again

“...there needs to be a focus on the “...the Baloch are our brethren and their distribution of both power and resources grievances must be properly alleviated. It from the provincial capital to the is necessary for all of us to move forward.” remaining districts within the provinces.”

Mian Mehmood-ur-Rasheed Sakib Sherani Leader of opposition - Punjab Senior Economic Advisor for several public and private institutions in Pakistan Wasthe7thNFCawardadequate(intermsofprovincialshare) forthesocio-economicdevelopmentoftheprovince? Wasthe7thNFCawardadequate(intermsofprovincialshare) Do you think the NFC process should cover the three The 7th NFC awards were made with mutual cooperation and forthesocio-economicdevelopmentoftheprovinces? administrativeregions(FATA,GB,AJK)?Whyorwhynot? understanding between all the relevant stakeholders. The consensus was across the board and I believe the award was quite Both vertical and horizontal frameworks saw huge breakthroughs The Balochistan National Party (BNP) believes that no area in adequateforPunjab. in the 7th NFC, but it fared inadequate in its ability to deal with Pakistan should be deprived of development and funds. certain things. For example, the provinces were meant to adopt Therefore, the NFC should indeed cover these three Do you think the divisible pool should be broadened? If yes, the revenue mobilization measures. These were discussed brie0y administrative regions in order to boost their socioeconomic whataretheoptions? on the sidelines, but never really institutionalized when they conditions. shouldhavebeen. There are always means to broaden the pool and to improve the system, especially if there are serious grievances from one Do you think the divisible pool should be broadened? If yes, province or another. However, moving forward, any steps taken whataretheoptions? should be .ltered through proper channels and mechanisms to haveconsensusontheissue. Although the pool seems adequate, at times, the center resorts to certain measures that fall outside the realm of the divisible pool. An example is the Gas Infrastructure Development Cess (GIDC), a What changes would you like for the 8th NFC in terms of the blatant move by the center to occupy a pool of money that vertical and horizontal distribution criteria of the divisible rightfully belongs to the provinces, outside of the divisible pool. pool? ThisreallyunderminesthespiritoftheNFC. There is no harm in looking at things anew. I will reiterate that What changes would you like for the 8th NFC in terms of the consensus and mutual understanding is very important. This vertical and horizontal distribution criteria of the divisible perception of neglect that certain provinces face, needs to be pool? addressed properly. The Baloch are our brethren and their grievances must be properly alleviated. It is necessary for all of us The idea is to shift the focus away from allocation and transfers to to move forward. spending outcomes. The allocation seems adequate, the mechanisms seem sufficient. However, the implementation and Don't you think there is a need for a criteria based provincial monitoring framework is missing. Budgeting outcomes should be .nance commission award (PFC) on the pattern of the NFC? madeapartofthecriteria. Hasyourprovincedoneanythinginthisregard? Do you think there is a need for a criteria based provincial As far as I know, no work has been done and despite demands .nancecommissionaward(PFC)onthepatternoftheNFC? from the opposition, I get the sense that the government is not serious about this issue. Our rulers disproportionately allocate I believe that is absolutely important.The provinces have usurped and spend funds, where one constituency or area gets a ton of all rights whereas the local governments need to be made development, while another is systematically neglected. This is functional. There needs to be a focus on the distribution of both not fair. Local elections and a transparent PFC is absolutely power and resources from the provincial capital to the remaining necessary. The current system of block allocation without districtswithintheprovinces. transparency, accountability and looking at the local socio- economiccontextandotherconditionscannolongerstand. Do you think the NFC process should cover the three administrativeregions(FATA,GB,AJK)?Whyorwhynot? Do you think the NFC process should cover the three administrativeregions(FATA,GB,AJK)?Whyorwhynot? Conceptually and in the spirit of the constitution, these areas should possess autonomy and not be controlled by the center, The constitution does not consider these areas provinces.They are both democratically and .scally.That should be the eventual goal. not an independent unit. But keeping their needs in mind, the However,asitstands,constitutionallythiscannothappen. federal government should make the award so that it meets their needsunderthepredeterminedfederalbudget.

36 37 YouthVoices YouthVoices BALOCHISTAN SINDH

Do you think provinces have increased allocations for youth interventions Do you think provinces have increased allocations for youth interventions after the 7th NFC award? after the 7th NFC award?

Mansoor Khosa Sabeera Afzal Waris Nawaz Sadia Khokhar

After the 7th NFC Award, both the federal government and After the 7th NFC award, the share of tax revenue of the provinces have failed to increase allocations for youth I think the youth has been highly neglected as any other provinces was increased and funds were transferred from Even though the remainder of the provinces received interventions. Rising debt servicing and defense and area of human development in Pakistan. They can the federal government to the provinces. Post the NFC, the adequate funds for youth uplift schemes, nothing of this security related expenditures have further reduced contribute in the development of the country with proper Balochistan government did introduce the 'Merit Award effect happened in Balochistan.E vents on the pattern of .nancial space for the federation. Despite being cash- education, skills training and motivation. Yet, the youth is Scholarship' scheme, awarded to students who took the 'OneYoungWorld' conferenceshould be organized so strapped the PML-N government is pursuing Nawaz not properly trained and educated to materialize the positionsintheMatricandFSC. astomotivatetheyouth. Sharif's pet mega projects. It has shown increasing potential they have due to ignorance of the government in appetite for foreign credit and loans borrowing Rs. 611 thissector. billion just in 40 days from the State Bank of Pakistan, againstRs.507billionforthefullyear2012-13.

Shayan Marsia Munira Mujtaba Fatima Iqbal Khan Nazeer Durrani After the 7th NFC, we did see a miraculously elected PTI in In our endeavor to make Pakistan a democracy, the 7th KPK allocating a mere 27.1 percent of their budget towards NFC award is de.nitely a notable achievement. However education followed by 26.2 percent of Punjab's. Same is The Balochistan government has not increased funds post I have not seen any special measures taken. Recently, a the new .scal budget has still not taken the youth factor the case for employment opportunities, as after the PML-N the 7th NFC. The provincial youth policy has not been 'Sports and Culture Festival' was organized by the into account. The budget allocation towards education getting elected, Pakistan has seen an in0ux of foreign .nalized till date. There is a huge amount of Balochistan government that primarily served the and employment is not enough. Pakistan remains a investors and that surely is a step towards a better Pakistan disappointment within the youth owing to the neglect of interests of the coalition government. However, I can safely gerontocracy that ignores the potential role of the youth. for youth. However, the budget allocated towards federal thegovernment. saythatthiswasbiasedtoo. We need to improve the quality and quantity of education education was seen decreasing after 2011 due to our in every province. Moreover, the education budget should politicians' incompatibility to keep promises. The only incorporate mechanisms that enable the young populace thing Pakistan needs right now is better .nancial to.ndviablejobsaftereducation. accountability.

38 39 YouthVoices YouthVoices PUNJAB AZAD JAMMU AND KASHMIR

Do you think provinces have increased allocations for youth interventions Do you think provinces have increased allocations for youth interventions after the 7th NFC award? after the 7th NFC award?

Shezadi Arshad Mudasar Nazar Sundas Qureshi Raja Wasim

It would be great if AJK become a part of the NFC after The AJK should be part of the NFC. The Kashmir The last NFC award has brought some profound changes in Post the NFC award, a lot of work is done in this direction which it would receive funds that could be allocated to the government should utilize the funds obtained from the the resource distribution formula. The .nancial but larger efforts are required for meaningful youth. These funds could be used to launch different NFC to establish technical training centers for youth. This implications of this award for the federal and provincial engagement. The government needs to be more programstoeradicateemploymentissuesintheyouth. will eradicate the pest of unemployment faced by the governments are vast and long-lasting with a substantial effectively involved in the career development process, youthintheregion. increase in transfer. However, youth expectations did not develop skills, and build awareness of options for future materialize due to many external and internal factors that employment,careers,andprofessionaldevelopment. affectedthefederaltaxcollection.

Maryam Gul Umair Javed Sumia Sajid Kashif Naveed

If they have, I am not sure that manifests itself in the minds If AJK is made part of the NFC and receives funds, then the I think Punjab has done some good work by investing in There is so much uncertainty regarding employment in the of youth. Most of the activities and opportunities we have region will prosper. Unemployment is the biggest problem youth festivals and the sports festival they put together region. For this reason the AJK should be made part of the are generated by the educational institutions we are a part in the region. The establishment of vocational centers last year. I am not sure whether that is enough, as I am not NFC so that the funds can help launch technical training of, or the communities we hail from. The NFC award may along with introducing internship and educational privy to how much money should be or is spent on youth programs for the youth which can equip them with skills to have given Punjab the lion's share, but it doesn't seem to opportunities will encourage the youth to reside in the interventions,butIdofeelthereisprogress. starttheirownbusinesses. translatewelltoyouthinterventionsintheprovince. region thereby preventing them from shifting to other regionsandcountriesinsearchofjobs.

40 41 YouthVoices GILGIT BALTISTAN

Do you think provinces have increased allocations for youth interventions after the 7th NFC award?

Noor Muhammad Saira Imtiaz

The youth in GB has been deprived of any residual bene.ts that might have provided them opportunities for growth. There has been some investment in the youth post the 7th It is high time for the federal government to prioritize the NFC, however very minor. The Prime Minster's youth loan DEVELOPMENT ADVOCATE needs of the youth of the violence-prone GB and FATA scheme is a good initiative as it is not restricted to any region, and actively bene.t them by taking robust province. Having said that, I am hopeful that more constitutional,legalandstrategicmeasures. incentivesfortheyouthwillemergeinGB. PAKISTAN

Irfan Nazar

In Punjab, several programs for the youth have been launched such as the laptop scheme etc. However, neither the government nor the civil society has played any part in bene.tting the youth in GB. Hence, I am not sure if any law canchangetheindifferentattitudeofthegovernment.

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