Building discourse on NFC

Intergovernmental revenue transfers may not be the most exciting topic for drawing room discussions; nor the easiest to understand. But like it or not, the revenue distribution among provinces, and between provinces and the centre, eventually impacts the lives of all the practical men and women who consider themselves exempt from such discussions.

Whether a province has adequate funding to spend on the health and education of its citizens; whether the centre has enough money on its table to spend on security issues; the answer to these and many other related questions eventually boil down to the formula of intergovernmental revenue distribution decided by the NFC Award.

Unfortunately, as this column highlighted last month, the federal government has put the NFC Award on the back burner (See BR Research columns: ‘NFC Negotiations’ and ‘Fixing the NFC Award’ on April 04 & 05, 2017).

The provincial governments as well as opposition political parties have also been found largely silent on the issue; perhaps because they are not very much enthused by the idea of reducing the size of the divisible pool by allowing the centre to take away funds for security spending upfront.

In an attempt to fill this discourse gap, the Islamabad-based think tank Prime Institute has been trying to raise the issues since last month by holding consultative sessions across the country. The fourth in that series was held in Karachi earlier this week. Speaking at the session, Dr Kaiser Bengali, Senior Economist and Balochistan’s technical member on the National Finance Commission, brought to light the details of the existing revenue-sharing formula.

The existing formula is based on four indicators, namely (a) population, (b) inverse population density, (c) revenue collection or generation, and (d) poverty – with each indicator having different weights. But the devil they say lies in the details.

Instead of using annual changes in these statistics to arrive at annual distribution of revenue between provinces, the distribution under NFC formula remains static for a period of five years, or more in case the centre and provinces choose not to revise the formula. In other words, while there is little doubt that provincial share in population, revenue collection or generation, and poverty must have changed (however little) each year since 2010, the percentage share of each province has remained unchanged since 2010.

Some experts argue that these changes are the reason why NFC ought to be awarded every five years. But this column contends that five years is a long time, especially in a country where five years can easily extend to ten years.

For instance, it takes only one natural disaster to push hordes of households into poverty in any province; or it takes only one wave of conflict-torn IDPs to create additional population pressures on any other province. Failure to adjust revenue distribution (in percentage terms) based on annual changes in poverty and population will therefore be unfair to the province in question.

Second, theoretically at least, revising the percentage distribution based on annual changes in the four indicators will keep the NFC discussion relevant each year, since it will force parties to sit down each year to incorporate the annual changes in these indicators. The political haggling over these indicators each year can also lead to improvements in the quality of relevant datasets. It is hoped that Prime Institute would include these ideas in the ensuing debates and discussions.

Another step that this column would advise Prime to build the discourse on NFC is to hold sensitization forums for business chambers. As Nasim Beg, CEO of Arif Habib Consultancy, rightly said at Prime’s moot in Karachi this week, businesses have a lot of stake in the size of the provincial kitty and how it is spent. This is because the responsibility of various forms of soft and hard infrastructure, such quality of human capital, health services, road, bridges, etc. eventually lies with the provinces. And these soft and hard infrastructures affect the productivity of businesses.

Yet the reality is that save for raising din over GST on services or on the rates of various provincial taxes, businesses do not like to engage in the political economy of revenue distribution. Perhaps business leaders are unaware of the significance of NFC in terms of how it affects their productivity, competitiveness, and efficiency. Or they are too chicken to stick their neck out. The former can be fixed by holding awareness or sensitization forums; the latter needs some altogether different approach to separate men from the boys.