June 14 - 20, 2004





Despite last minute intervention of Prime Minister Jamali, the National Finance Commission failed to reach a consensus among the provinces compelling the authorities to request the President for extending the application of 5th Award for another (2004-05) year. The President was well advised not to intervene directly or indirectly in view of the sharply divided views of the provinces.

The strict stance of Sindh and Punjab Chief Ministers on revenue collection and population could not bring any results. Finance Minister had asked NWFP and Balochistan to stay and fix the amount of subsidies and grants for their next budgets. There is almost no time left to continue discussions to resolve and take it further.

The threads of discussions on the 6th Award will now be picked up gain after the announcement of the federal and provincial budgets. Finance Minister Shaukat Aziz has played his cards in the most shrewd manner. As a results, the provinces are now themselves made to look responsible for the bickering over the formula of distribution of proceeds, even though the federal government has not met their demand for a 50:50 ratio on the distribution of proceeds between the center and the provinces.

Now the budget is going to be based on the existing formula with some increase in grants and subventions to the provinces by the federal government since the finance ministers of NWFP and Balochistan have been asked to stay in the capital to discuss shortfalls in their budgets which would be met through higher grants which are currently capped Rs. 3 billion and and Rs. 4.8 billion, respectively. The beneficiary, of course, is the federal government. And the credit for this would definitely go to no other than Mr. Aziz who has cashed in on the invetiable lack of harmony among the provinces over the issue of horizontal distribution.

The provinces other than Sindh have agreed that a 90 percent weightage be given to population and the remaining 10 percent to multiple factors minus revenue collection. But Sindh was adamant that revenue collection should be given some weightage. Sindh Finance Minister Sardar Ahmed has been quoted as saying that after a lot of discussions, other provinces refused to include revenue generation in the multi-factor formula.

Although the non-finalization of the NFC Award would affect the financial interests of all the four provinces, the whole exercise has perhaps demonstrated one fact very clearly, the majesty of democracy. Now the representatives of each province feel that they cannot budge from the stance that they had taken keeping in view the interests of their people. It was not going to be similar what happened in the cases of previous awards, particularly the fifth award.

Without going into the merits and demerits of Sindh's demand that revenue generation be included in the multiple factor criteria, it is amply clear that the province is in no mood to give up its demand. And this despite realization that such an inflexible stance will result in the finalization of budgets without the finalization of the award, which in turn, would make the people of Sindh, rather than the other provinces, suffer.



According to sources in the Ministry of Finance, provinces will get Rs. 202 billion in 2004-05 from the federal divisible pool under the existing NFC award against Rs. 174 billion they had received during the current fiscal. We will be offering an additional Rs. 28 billion to the provinces in the next budget under the old resource distribution formula," said a senior official in the finance ministry. The official said there were other funds called 'straight transfers' that went to the provinces, including the excise duty on natural gas and crude oil as well as surcharge on gas. He expected that the federal government, that had provided Rs. 21.6 billion under this head to the provinces in 2003-04, would increase the amount in the next budget. He pointed out that Rs. 8.7 billion subventions were given to two provinces Rs. 3.9 billion to the NWFP and Rs. 4.8 billion to Balochistan. Balochistan, the official said, could not return its Rs. 5 billion overdraft to the State Bank as it did not get gas royalty from the petroleum ministry. The petroleum ministry had been directed to clear its dues payable to Balochistan by June 30, he added.

Asked as to why there had been no consensus on the 6th NFC award, he said Sindh was maintaining that it should be adequately compensated for collecting huge taxes. But this argument, he added, was not acceptable to other provinces who said they were paying port charges to Sindh and were therefore unwilling to accept that Sindh was making sole efforts in revenue collection.

Discussion on the 6th award will be resumed after 2/3 months from where the last meeting of the NFC broke up without resolution, the situation had boiled down to the Centre raising its offer to the provinces to 47.4 percent of the divisible pool. Later, press reports said the centre was willing to go up to 48 percent, with annual raises in this share until it reached 50 percent by the end of the Sixth Award in five years time. This 50 percent, it may be recalled, was the unanimous demand of all the provinces. While it is right that the provinces, fiscal needs should be accommodated so that the whole thrust of devolution of power (including financial powers) can be implemented in letter and spirit, the provinces too need to acknowledge the constraints of the federal government in terms of the security and defence environment in which the country is currently placed. There is merit, however, in the argument of the provinces that duplication of ministries at the federal level that rightfully belong in the provincial sphere is a waste of resources that could otherwise be available for the provinces. The centre's rather high collection charges of 5 percent too need to be reviewed and brought down to something more reasonable. As such changes and reforms are implemented, whatever additional resources are released should be given to the provinces so that their complaints are allayed to some extent.