Sep 07 - 13, 2009

The two-day National Finance Commission (NFC) meeting chaired by Federal Finance Minister Shaukat Tarin and attended by representatives from the four provinces ended on an optimistic note. This indeed is a good beginning and one would hope that the next NFC meeting would set the ball rolling towards a consensus. There is ample evidence that these are extremely delicate negotiations which require careful deliberations.

Two committees were formed, first comprising provincial and federal finance secretaries to determine benchmark expenses and recommend vertical distribution of resources and second committee consisting of all other NFC members charged with the responsibility of allocating horizontal distribution of resources.

The most disturbing fact is that the NFC award, meant to bring unity amongst the federating units, has to date been a source of conflict not only among the provinces but also between provinces and federal government. The conflict has mainly arisen due to population being the sole criterion for the distribution of resources among the provinces, benefiting Punjab the most. Over the years level of discontent has led to militant movement in Balochistan and demand for greater autonomy for provinces.

According to the 2006 award, Punjab's share of the divisible pool is 60%, Sindh 24%, NWFP 12%, and Balochistan 4%. There has always been vociferous demand for a change in the criteria of allocation of resources to provinces.

Sindh has been demanding linking of allocation to the amount of revenue generated in the province, with NWFP and Balochistan proposing a criterion linked to underdevelopment. This time around NWFP is demanding rise in its share due to the terrible economic costs borne by the people of the province from the ongoing military operation.

The 2006 award also witnessed a rise in straight transfers of royalties and gas and crude, excise duty on gas and development surcharge to Balochistan and NWFP, as well as hydel profits, capped at 6 billion dollars annually, which was NWFP-specific. Surely these rates must increase according to the price of the natural resource in the market.

There is a little doubt on the feeling of deprivation that has been heightened in the smaller provinces and until and unless corrective steps are taken promptly, the civil commotion is not likely to subside. The federal government has the responsibility to ensure that the federating units demand for resources are looked at from all angles - political, legal as well as from an economic perspective.

The failure is likely to further alienate the smaller provinces, which threaten the federation itself.

Lately, Salman Siddique, Secretary Finance and Revenue Division stated that the Award would be announced by September 30 and non-NFC issues of provinces would also be resolved. If at all there is a delay due to unavoidable reasons, it won't go beyond October 15. He said the Award would be judicious and transparent to promote harmony among the provinces.

The NFC is a mechanism to distribute federally collected financial resources between the federation and federating units: Punjab, NWFP, Sindh and Balochistan. Between 1974 and 1996, five NFCs were constituted. However, the provinces had failed to reach a consensus on 6th and 7th NFC due in 2002 and 2007 respectively. The former President Pervez Musharraf introduced Interim NFC Award for distributing the resources among the federating units in 2002-07. The PPP-led government also decided to continue the Interim Award for the fiscal year 2008-09.

Allocation of resources from center to provinces through National Finance Commission remains major bone of contention between center and provinces and even among provinces themselves. The Sindh's stance is that the distribution of resources must be made on the revenues basis as the province contributes the most in revenue generation to the center. Punjabs traditional stand is that only population criteria should be made the basis in awarding the NFC. Balochistan advocates the area and backwardness and greater share from its natural resources. While NWFP insists that poverty, royalty on hydro electricity projects and now the terrorism must be included for the just distribution.

The prevailing economic and security situation of the country demand sacrifices for the sake of national integration and cohesion amongst centre and all the four provinces. It is high time that all the provinces set aside their differences and work out a consensus which suits all. It is urged that the members of NFC should play constructive role to reach at a consensus through a policy of reconciliation and mutual accommodation.

Given the various demands of the provinces, it would be extremely difficult to overcome the issue unless delegates realize that one single criterion cannot be the basis for the NFC accord. The ongoing confrontation among the provinces negates the concept of federalism and is unlikely to be helpful in arriving at a formula based on multiple criteria. All considerations territory, population, underdevelopment etc - must go into the formulation of the award.

Unless provinces are given financial autonomy to impose any tax, make arrangements to collect it they would remain dependent on the federation. Provinces will have to generate enough finance to support their development programs. However, the federation will also have to transfer the responsibility of certain taxes to the provinces.

At present provinces face 'chicken or egg first' situation. They want more from the divisible pool because they could not generate enough funds and they could not generate enough resources because they have not been able to undertake developmental programs. The only regret is whatever quantum of funds smaller provinces get from the federal government only a minuscule amount is spent on the development.