NFC Award and K-P woes

Societies and states provide mechanisms for resolution of conflicts. Modern states perform such functions through institutions, as defined in the Constitution. Similarly, under Article 160 of the Constitution of Pakistan, the National Finance Commission (NFC) also devises a mechanism for distribution of revenues. The realisation of the goals set in the budget depends upon the timely release of those revenues.

The total budget of Khyber-Pakhtunkhwa (K-P) has been estimated at Rs923 billion, including Rs739 billion for settled districts, and Rs184 billion for the merged areas. Federal transfers, including Federal Tax Assignment, 1% War on Terror, and Straight Transfers will add to Rs477.5 billion while an amount of Rs58.3 billion is estimated against profits from hydroelectricity.

These transfers constitute 51.7% of the total General Revenue Receipts of the province. An amount of Rs453.4 billion (including 1% War on Terror) is expected to be transferred from the federal government to the K-P province during FY2020-21.

However, lamenting woes, the provincial government equivocally expressed that due to consistent lower federal transfers, provincial budgeting has negatively been impacted. FY2019-20 was no exception, and after 11 months, there was a shortfall of Rs134.6 billion. Since the province has a narrow revenue base, it relies more on the NFC Award and other releases from the federal government to meet the current expenditure as well as expenditure incurred on socio-economic development.

In this context, under the 7^th NFC Award, the distributions under the criteria are: 82% to population, 10.3% to poverty and backwardness, 5% to revenue collection/generation, and 2.7% to Inverse Population Density (IPD). Together with this 1% of the Gross Divisible Pool on account of war, K-P is entitled to 16.4% share.

The removal of a sense of deprivation of the people and uplift of backward areas depend on the successful completion of development and social service projects, which in turn depend on the timely release of due shares of the province, accruing out of the aforementioned funds.

Unfortunately, no major headway has been made ever since the 7^th NFC Award. Even the 8^th NFC Award completed its term without dividends. Same is the case with the 9^th NFC Award, as the first meeting on February 6, 2019 could not finalise the contours for distribution due to out-of-text terms of reference by the President.

All the political forces of K-P are unanimous in that the most important issue for the province in a fresh award is a recalculation of the provincial share on the basis of the 2017 census and the merger of the merged areas into the province, and a permanent settlement of the issue of net hydel profits (NHP) determination in line with Article 161 of the Constitution.

This brings to the fore the importance of and necessity for a recalculation of the horizontal share of K-P under the already agreed upon formula for horizontal distribution to be finalised by the 9^th NFC. Although the Prime Minister of Pakistan has also pledged 3% of the NFC share of Punjab and K-P, as well as the federal government, to be given to fund development needs of merged areas for the next 10 years, other provinces are dithering.

The per capita expenditure from FY2008-09 to 2018-19 in the merged tribal areas as compared to others had been shockingly low, therefore making the 3% share of the merged areas in the Divisible Pool even more urgent and imperative. Given that the Federal Tax Assignment and 1% War on Terror together effectively only cover the current expenditure, each of the energy heads is important for development in the province. The distributing element is that the erratic payments on account of hydel power, in proportion to the budget estimated amount, has adverse consequences in fulfilling the budgetary commitment. The total receipts in NHP amounted to Rs14.5 billion, 28% less than the previous year, and nearly 75% less than the budget estimate. Though disbursements have been made in the first six months of FY2019-20, after January no further payments were made which affected development spending in the province due to a weak financial team.

Connected to this is the issue of NHP. Despite signing an MoU on agreed upon interim methodology, since February 2016, the NHP tariff has been revised only once to Rs1.155/kWh whereas in actual, the NHP tariff should have been Rs1.337/kWh for the FY2019-20. This mismatch of NHP tariff is causing increased losses to the provincial revenue amounting to Rs7,572 million YTD. The provinces are aggrieved over the non-payments received under the NHP for the last five months (2019-20), piling up dues towards the federal government.

Another potential gap in NHP payment is the inclusion of Gomal Zam Dam. After the 25^th Amendment, Gomal Zam became part of K-P, therefore, NHP should also be applied to its generation. This still remains pending and approximate arrears of Rs116 million are due to K-P. The same is the case with royalties on oil and gas, which have to be worked out in accordance with Article 161 of the Constitution and Natural Gas (Development Surcharge) Ordinance, 1967.

In accordance with the 7^th NFC Award, “Each of the provinces shall be paid in each financial year as a share in the net proceeds to be worked out based on an average rate per MMBTU of the respective province.”

The federal government has failed to determine excise duty on oil, as such the province is being deprived of substantial revenues, even though K-P produces more than 50% of the national oil.

Since infrastructure development and socio-economic development are mainly dependent on federal transfers, a sustained and predictable release of funds is imperative for the province. It is time to work out the 9^th NFC Award to the satisfaction of the province and announce it without further delay.

Published in The Express Tribune, January 6^th, 2021.

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