Explainer: What is the NFC award?

This piece is part of our educative web series 'Explanare' to understand complex economic and political issues

KARACHI: President Dr Arif Alvi has reconstituted the 9th National Finance Commission (NFC) to work out a new resource distribution formula between the Centre and the federating units.

The new 10-member commission has Finance Minister Asad Umar as its chair comprising federal finance secretary as the official member, four provincial finance ministers (statutory members), and their respective technical members (non-statutory members).

The commission’s next meeting is scheduled for March 29, 2019. If consensus is reached this year, resource distribution from 2020 will be according to the new award for the next five years.

But what is the NFC award and how do you explain it all simply?

The Express Tribune interviewed economist Asim Bashir Khan to convey the complexity to a layman, and perhaps others. Excerpts:



ET: What is the NFC award, how it came into being and why is it important?

A B Khan: Pakistan is a federation and has four federating units, i.e. Sindh, Punjab, Khyber-Pakhtunkhwa (K-P) and Balochistan, as well as other territories including Gilgit-Baltistan and Azad Jammu and Kashmir which come under the federal government directly. The NFC award is meant to distribute financial resources between the federal government (vertical distribution), and the provinces (horizontal distribution).

After the promulgation of the Government of India Act, 1935 which introduced provincial autonomy in colonial India, then British government announced the first award called Niemeyer Award in 1936.

The Raisman Programme formerly known as the Raisman Award was the succession of the on-going programme of economic reforms in Pakistan announced by Prime Minister Liaquat Ali Khan. The then Secretary Finance, Sir Jeremy Raisman was appointed to prepare the mechanism for the distribution of tax revenues. Later, the award was renamed as the National Finance Commission.

The NFC award includes the distribution of taxes collected by the federal government which form a divisible pool. This pool includes taxes on income including corporate tax, sales tax and export duties, etc.

Pakistan has historically been a highly centralised federation, and the federal government has massive powers to collect tax revenue, which are then distributed among the provinces. It determines the tax base: who should be taxed, the percentage of tax as well as the tax collection mechanism.

According to Article 160 of the Constitution, after every five years the president will constitute the NFC for a period of five years.

Once there is a consensus of all stakeholders on a particular formula to distribute the finances, the award will be implemented for the next five years.

ET: What is the issue over distribution of financial resources in Pakistan?

A B Khan: From the divisible pool, at the moment, out of every hundred rupees, the federal government receives 42.5% whereas 57.5% goes to the provinces.

The distribution of finances among the provinces was, until 2010, solely based on population. This meant a major share of the resources went to Punjab.

Public investment complements private investment. Since there was minimal public investment in Balochistan and K-P ever since the colonial era, both the provinces remained deprived of private investment as well. Hence, historically, they have been at a disadvantage.

Secondly, other than the divisible pool, funds are transferred to the provinces as right of royalty over their resources, and grants that are developmental and non-developmental. Historically, the smaller provinces did not receive their due share in royalty, i.e. exploitation of gas from Balochistan.

ET: How can these issues be rationalised? Have there been any efforts to address the grievances of the federating units?

A B Khan: The NFC in 2010 has addressed at least a long over-due concern and made a shift from population-based criteria.

It introduced a multiple indicators formula for the distribution of financial resources among the provinces. The indicators now are population (82%), poverty and backwardness (10.3%), revenue collection and generation (5%) and inverse population density (2.7%).

This 7^th award was announced with consensus of the provinces in May 2010. Punjab sacrificed its share of 5.62% which was redistributed among other units.

Still, the 82% weightage of population outweighs other indicators. This may further be cut down to devise a more inclusive formula.

Also, the NFC award, under Nawaz Sharif’s first government in 1990, agreed to compensate Balochistan and K-P for their right of royalty and paid the same as arrears under non-development grants which are discretionary grants and can be spent on as you please.

The 8^th award in 2015 under the last government, however, remained inconclusive.

ET: Given that consensus was reached in 2010, why can’t we continue with the same formula?

A B Khan: It is a constitutional requirement under Article 160 to constitute the NFC after every five years.

The 9^th NFC award is challenging because provinces now have more subjects and more responsibilities after the passage of the 18th amendment, and are demanding greater resources.

The erstwhile FATA has been merged into K-P, whose relative share will automatically increase for at least on the basis of population, area, and poverty.

At the same time, the federal government is facing financial constraints, so making a win-win deal which is convincing and acceptable for both the federal government and the provinces is the biggest challenge.

The writer is a member of staff. He tweets @WaleedTariq89

-This interview is part of our educative web series 'Explanare' to understand complex economic and political issues