9th NFC Award and sustainable development

Provinces lack incentives to achieve SDG targets

ISLAMABAD: After the 18th Amendment, the federation and provinces in Pakistan are expected to engage in a complicated pattern of cooperation and conflict at the same time – propelled by a narrative of institutionalising the devolution process.

The debate to ensure a meaningful devolution for sustainable development, however, constitutes a paradox as the criteria for horizontal distribution of divisible pool taxes itself are self-defeating.

The World Bank in its latest report “Pakistan@100: Shaping the Future 2047” states that high fertility rates are associated with poor maternal and child health, and lesser female labour force participation. By giving population a whopping 82pc weightage in the NFC Award formula, the body politic has been indirectly discouraging provinces from achieving better population control altogether.

9th NFC award: What do the provinces want?

Moreover, the disparity in population growth rates between Balochistan and the rest of Pakistan means that the problem of fiscal inequities will worsen with time. In such a scenario, there is no incentive for provinces like Punjab to achieve Sustainable Development Goal (SDG) targets related to population control as it means giving up their future claims of revenues from the divisible tax pool.

Likewise, if poverty and backwardness continues to be given a weight of over 10%, there is no incentive for Balochistan to invest in human capital and employment creation as it means giving up future federal allocations in favour of the next poorer province. The main bone of contention, however, remains to be population-based allocation of federal transfers and not poverty-based ones.

The core issue here should be about fairness and not politics of revenue-sharing. Since partition, the provinces have had widely varying levels of wealth but the quality of public services in each province should not depend on that level of wealth.

Sometimes fairness means transfer of wealth from a rich province to another but again this might create a permanent dependency among not-so-wealthy provinces. We do need a system of equalisation payments but the criteria for sustaining such transfers should involve objective performance indicators and achievement of SDG targets.

But what we see in Pakistan are various extreme approaches.

Karachi contributes 55% of federal tax revenue but not even 10% of that is spent on improving public services in Karachi. By not taxing its voter base in the rest of Sindh, the provincial government is, in fact, subsidising development there at the expense of Karachi.

This means devolution won’t be happening in Karachi anytime soon as this will crash the model of equalisation transfers to rural Sindh.

Similarly, Islamabad generates Rs4.6 billion in taxes, but only Rs1.3 billion is spent back on capital’s development programmes - despite a dire need to solve its water scarcity problem.

Jul-Mar FY19: Federal govt gives Rs1.8tr to provinces under NFC Award

Lahore, on the other hand, contributes 15% of federal tax revenue, but nearly 50pc of Punjab’s revenue is spent back on Lahore. This has resulted in net migration to Lahore from other cities reaching record levels.

If an NFC-style formula based on population is used to determine the share of future Lahore district governments, it will reinforce this migration trend in a vicious unsustainable fashion.

The World Bank also calls for federal reforms to increase the tax-to-GDP ratio by broadening the tax base if the country needs to invest more in its infrastructure and people. The federation, however, instead of increasing its fiscal space by introducing FBR reforms is looking to distort the vertical distribution of resources in the next NFC Award.

To achieve this, the federal government has proposed the recovery of subsidies on energy and social programmes such as BISP from provinces – besides setting up a security-related fund, which could cut provinces’ share in the range of 6% to 8%. Provinces, however, won’t agree to this as it is not in sync with the spirit of the 18th Amendment.

In such a case, the federal government will again try to exploit legislative loopholes in the constitution - such as Article 160 (6) which provides the scope for creative financial engineering by giving president the power to add or delete any tax in the divisible pool. In 2018, the federal government imposed a similar levy on petroleum products by treating it as a non-tax revenue to meet its fiscal deficit.

Article 160 (7) permits equalisation transfers from the federation on a need basis to poorer provinces and may be used to complement transfers besides those under the discriminatory NFC Award.

So while the 18th Amendment and the NFC Award framework is widely misunderstood and considered a political minefield, it is when the federation decides to cut transfers under Article 106 (6) without provincial consensus that we have a problem. The system at present is not perfect but it is not broken either.

The writer is a Cambridge graduate and is working as a strategy consultant

Published in The Express Tribune, May 20^th, 2019.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.