Article for December 15, 2009

The 7
th
NFC Award
By
Dr. Ashfaque H. Khan

The federal and provincial governments have developed a landmark consensus on the 7
th

National Finance Commission (NFC) Award after thirteen long years. The historic consensus
could not have been achieved without the rare display of mutual understanding, accommodation
and magnanimity of all the stakeholders. The federal government sacrificed its share of resources
in favor of provinces and three provinces in general and Punjab in particular, accepted reduction
in their shares to provide more resources to Baluchistan. Finance minister Shaukat Tarin in
general and Punjab Chief Minister Shahbaz Sharif in particular must be commended on this
historic achievement.

The highlights of the consensus on the 7
th
NFC Award include major adjustments in vertical as
well as horizontal distributions. In vertical distribution, the federal government has sacrificed its
8.5 percent share in divisible pool in favor of provinces. In other words, the provinces would
receive 56 percent of the net divisible pool in the first year (2010-11) and 57.5 percent during the
remaining period of the Award. Accordingly, the share of federal government would decline to
44 percent and then to 42.5 percent, respectively.

In horizontal distribution, the shares of Punjab, Sindh and NWFP are reduced by 1.27 percent,
0.39 percent and 0.26 percent, respectively. The reduction in total share of three provinces
(1.92%) is passed on to Baluchistan by increasing its share by 1.92 percent. Thus, Baluchistan
appears to be the major beneficiary as its share in net divisible pool would increase to 9.09
percent from 7.17 percent. The share of Punjab will decline to 51.74 percent from the current
level of 53.01 percent. Thus, Punjab will render major sacrifice to provide more resources to
Baluchistan.

The consensus on multiple criteria as opposed to population being the sole basis for revenue
sharing is perhaps the greatest achievement of the 7
th
NFC Award. Pakistan was the only country
that used population as the sole basis for revenue sharing. International experience suggests that
countries have used multiple indicators for revenue sharing. The most commonly used criteria
includes population, tax collection, fiscal efforts of the provinces/states, area and backwardness.
These countries have assigned different weights to each indicator. The historic consensus on the
7
th
NFC Award owes heavily to the magnanimity of the Chief Minister of Punjab for accepting
multiple criteria for revenue sharing.


The 7
th
NFC Award is based on multiple indicators which include population with 82 percent
weight, poverty/backwardness (10.3%), revenue collection/generation (5.0%) and area or inverse
population density (2.7%). The other highlights of the Award include: reduction in federal tax
collection charges from 5 percent to 1.0 percent, thus enhancing the divisible pool by 4
percentage points; and Sindh would receive additional Rs. 6 billion from federal government,
which is equivalent to 0.66 percent of the provincial pool. Recognizing the role of NWFP as a
frontline province in the war against terrorism, it has been agreed by all to provide additional 1.0
percent of the divisible pool to NWFP in addition to the commitment by the federal government
to bear all expenses of the war on terror; and accepting sales tax on services as provincial subject
which will hopefully be collected by provinces.

Why did the last two attempts to generate consensus on NFC Award during 2000-2006 fail?
Why it succeeded this time? In my view, two things have made the difference this time as
compared to the past. The first attempt was made to arrive at the consensus during 2000-2002
but the provinces could not agree on recommendations owing to their divergent views on the
resource distribution formula. The second attempt was made during 2005-2006 but it also failed
for the following reasons. Firstly, the provinces had sent their representatives to the NFC
meeting, with resolution passed by respective provincial assemblies on their stand. The
representatives would not budge from their stated stand, and would show complete inflexibility.
This time, the representatives went to the meeting without passing resolution on their stand from
respective provincial assemblies and thus showed greater flexibility.

Secondly, Punjab had taken firm stand on population being the sole basis for revenue distribution
and was unwilling to deviate from its stand even by 0.001%. While all the remaining three
provinces were equally firm in their stand that multiple indicators should be the basis for revenue
sharing among provinces. This time, Punjab and its Chief Minister showed immense flexibility
by deviating from their earlier stance and thus paving the way for historic consensus on the
Award.

The experts who provided technical support to their respective provinces also played key roles in
achieving consensus. In the past two attempts, some experts did not play their fair roles in
building consensus for the Award.

The 7
th
NFC Award would provide substantial resources to the provinces during the next five
years. It is now up to them as to how efficiently they would use the resources to improve the
living standards of their people. Large resources go with greater responsibilities and financial
discipline.

The success of the IMF Program would now depend on the financial discipline of the provinces.
With rising debt servicing and defense and security related expenditures of federal government
and reduction in its share in divisible pool may result in large budget deficit for the federal
government. In order to achieve budget deficit target in the range of 2.5 to 3.0 percent of GDP in
the medium-term, the provincial governments would have to generate large surplus cash
balances. Provincial governments will have to develop capacity to spend efficiently and
effectively. If current spending patterns are maintained by the provinces then I am afraid that
even the large resources would not be enough, thus putting Pakistans public finance in disarray.
I pray that this supposition is proven wrong by the provinces in the years to follow.



The writer is dean and professor at NUST Business School, Islamabad. Email:
ahkhan@nims.edu.pk