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NFC – Bottlenecks and Possible Solutions

Next NFC Award will be announced soon: Ishaq Dar (Courtesy: Khyber News)

Study of political arrangements of countries across the globe reveals that most of the central governments generate more revenues than regional/provincial governments. This disparity calls for establishment of revenue distribution authority or other legal arrangements for revenue or resource distribution. Transfers are required to make provinces/states able to meet their expenditure as the gap between province/state’s revenue potential and expected expenditure is wide.

For this purpose, Article 160 of the 1973 Constitution of Pakistan states that, “Federal Government will set up a National Finance Commission (NFC) at an interval of no more than 5 years for distribution of resources among federation and its units”. Provinces, further, will form Provincial Finance Commission (PFC) for re-distribution of these among provincial government and lower tires.

If we count years from 1973 to date, at least nine NFCs should be in place according to constitutional requirement. However, due to military interventions and deadlocks only five NFC have been formulated since 1973. However, starting from 1947, nine awards have been issued. These are: Riesman Award of 1951, and the NFC awards of 1961-62, 1964, 1970, 1974, 1990, and 1996, the Presidential Order of 2006 and the 7th NFC award 2009.

Empirically, the divisible pool has been shared amongst the provinces on per capita basis. Though, since 1996 three out of four provinces have been demanding inclusion of such elements that would enable it to the greater transfers from the divisible pool.

In 2008-09, major breakthroughs occurred like 18th amendment, completion of tenure of elected government and first democratic transition of elected government. In this period, 16 year deadlock on finance commission had come to an end. This was considered as a major development as it had been issued after a deadlock of 2001 and 2006 awards, due to which president had to issue a presidential order of 2006. The formula in 7th NFC has been revised and provincial share has been increased up to 57% .While federal share had setup at 43% with a steep decline of 10%. With this Multiple Indicators Criteria (MIC) was also introduced. MIC includes inverse population decay and exponential rate, derivative change of poverty and societal backwardness, provincial GDP growth and revenue collection and urban density factor. 7th NFC award is a mile stone and it shows the power of elected government to overcome any deadlock. Certain provisions of famous 18th amendment have also secured the award from mishandling. These include prior consultation of the federal government with the provincial governments, the provinces share to be not less than in the previous award, biannual monitoring of implementation of the award by the federal and provincial finance ministers, presentation of their reports to the National and provincial assemblies. However, it is only a step towards a very far laying destination. Miles have to be covered yet. The latest award expired in June 2015 and new NFC award has not been announced yet.

Bottlenecks still exist and will persist until something significant is done in this regard. Three kinds of logjams need attention. Firstly, it is what should be the share of federal government in the divisible pool. This issue has been somehow resolved for now as federal’s share has been significantly reduced in the 7th NFC award. Secondly, inclusion of type of indicators in the formula and their respective weightages. Third is the unanimity rule – all the provinces and federal government must agree is the principle that the commission follows in making its recommendations to the government. Unanimity rule is the main cause of deadlock and delays in announcing NFC awards. To overcome these bottlenecks, countries across the globe have devised three types of mechanisms for resource distribution which includes central agency, inter-governmental forum, and independent agency.

Central agency works directly under a federal ministry. Central government is fully and solely involved in the process and voices of constituents units are not incorporated in it. Essence of federalism i.e. decentralization is violated in this approach and democratic principle of incorporating voices of the masses in decision making seems more valid. Countries that are relying upon central agency include Kyrgyz Republic, Tanzania, China, Italy, Kazakhstan, Netherlands, Poland, Switzerland, Ukraine, Ghana, Zambia and Japan.

Inter-governmental forum consist of representatives from all constituent units and a collaborated decision is made on distribution mechanism. It is a very good and democratic approach. However, to achieve an agreement and to develop a consensus is very difficult, mostly leads to a deadlock. Germany, Indonesia and Nigeria, South Africa, Pakistan and India are relying upon this kind of institutional arrangement.

An independent agency was formed by Australia for the first time to administer such affairs. Usually it has an advisory nature. Its job is to work on technical aspects of resource distribution and division of divisible pool. Final decision is, however, made by central government. Now days, this form of arrangement is also very popular in India and South Africa.

This is a very effective approach to keep politics away from governance. Delays in decision making, increase in complexities and to keep a check on political attachments of members of agency are considered as criticism upon independent agency approach.

Pakistan can also start thinking upon any of the three options to settle the recurrent logjams over NFC award once and for all.

Saddam Hussein

Saddam Hussein

is pursuing his M.Phil. in Public Policy from School of Public Policy, Pakistan Institute of Development Economics, Islamabad.

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