Punjab makes room for historic NFC accord
By Nasir Jamal
Saturday, 12 Dec, 2009

LAHORE: In what was described as a historic development, the four provinces, with the active support and participation of the federal government, agreed on the seventh National Finance Commission (NFC) award here on Friday.

The way to a consensus, which has been hailed as a victory of democracy, was paved by an agreement among the provinces on distribution of financial resources allocated for them in the federal divisible tax pool on the basis of a four-point formula.

The federation displayed unprecedented generosity by increasing the provinces’ share under the vertical distribution of funds from the divisible pool to 56 per cent in the first year of the award (2010-11) and to 57.5 per cent during the remaining period of the five-year award.

The share of the provinces in the pool is 47.5 per cent for the current financial year under the existing (sixth) NFC award.

The centre has also agreed to reduce collection (of taxes) charges to just one per cent from the existing five per cent, which will increase the actual transfers to the federating units from the divisible pool under the next award to more than 60 per cent.

This is for the first time in the country’s history that the provinces, particularly Punjab, have agreed to share funds from the federal tax pool on the basis of multiple criteria in place of the existing population-based formula for horizontal distribution.

The smaller provinces had been demanding inclusion of criteria other than population for horizontal distribution since 1980s. But Punjab resisted the demand all along because it feared a sharp cut in its share from the federal transfers.

The criteria agreed upon include population, backwardness (poverty), revenue (generation and collection having equal weight) and inverse population density.

Population has been allocated a weight of 82 per cent in the horizontal distribution formula, backwardness 10.3 per cent, revenue five per cent and inverse population density 2.7 per cent.

The agreement on the new formula for the sharing of the provincial pool was preceded by long-drawn-out negotiations among the provinces, especially between Punjab and Sindh, on the issue of revenue that forced the negotiators to extend the two-day meeting for another day to finalise the recommendations.

Chief Ministers Shahbaz Sharif of Punjab, Syed Qaim Ali Shah of Sindh, Amir Haider Hoti of NWFP and Nawab Aslam Khan Raisani of Balochistan remained actively engaged with the commission during the three days of talks to help negotiators narrow their differences and find solutions to contentious issues.

At the end of the day, the commission was able to find technical solutions to all the issues.

After implementation of the award, the percentage share of Punjab will be reduced by 1.27 per cent to 51.74 per cent from the existing 53.1 per cent. Sindh’s percentage share will decline by 0.39 per cent to 24.55 per cent from 24.94 per cent and NWFP’s share by 0.26 per cent to 14.62 per cent from 14.88 per cent.

The three provinces agreed to the cut in their percentage share in order to enlarge the share of Balochistan to 9.09 per cent from the existing 7.17 per cent in view of its special needs.

Balochistan will receive Rs83 billion from the pool during the first year of the award. A shortfall, if any, in this amount will be made up by the federal government from its own resources.

This arrangement for Balochistan will remain protected through the life of the next award.

In compensation for its acceptance of allocation of an equal weight to generation and collection of revenue, Sindh will receive an additional transfer of Rs6 billion — equal to 0.66 per cent of the provincial pool from the federal government.

The federal government announced compensation for Sindh from its own pocket because all grants and subventions, which constituted around 10 per cent of the federal divisible pool created in the current award, have been done away with on the unanimous demand of the provinces.

The NWFP will get an additional one per cent from the undivided federal pool (that is before the determination of federal and provincial share in it) to compensate it for the losses suffered by its economy on account of the ongoing war on terror in the province. The amount will be equivalent to 1.83 per cent of the provincial pool.

Finance Minister Shaukat Tarin, who announced the award in his capacity as chairman of the commission in the company of the four chief ministers, said the federal government had committed to underwriting all the expenses borne by the NWFP because of the war against terrorism.

The NWFP chief minister said the allocation of funds from the undivided pool for his province meant that all the provinces owned the war on terror.

The next award is unique in the sense that the commission has also addressed several long-standing issues that have spawned inter-provincial tensions and weakened the foundations of the federation.

In addition to replacing the single-point population-based criterion with four-point multiple criteria, the commission has also amicably addressed non-NFC issues like the federal government’s dispute with the NWFP on net hydel profits and with Balochistan on gas development surcharge.

The two provinces are set to receive over Rs100 billion each as a result of resolution of these issues. The centre has also accepted the constitutional right of the provinces over sales tax on services and allowed them to collect the tax if they so desired.

Mr Tarin congratulated the provinces for their accommodating and generous role that helped to achieve the breakthrough on contentious issues which were stalling an agreement on the horizontal distribution.

‘All the provinces have shown magnanimity and flexibility to accommodate one another,’ he said.

The federal government too had played its role and tried to bridge the trust deficit between the federation and the provinces, he added.

It may be recalled that the government of former president Gen Pervez Musharraf failed to deliver a consensus award despite years of negotiations and had to impose an interim award through a presidential order.

This is the second award given by the elected government in 19 years. The 1997 award was finalised by the caretaker government of Farooq Leghari.

The finance minister said the federal government was making efforts to increase the size of the federal divisible pool to create more funds for the federating units.

‘We propose to boost our tax-to-GDP ratio to 13.9 per cent from the current 8.8 per cent over the next five years. In addition, the federal expense is being reduced to 12 per cent from 14.6 per cent. That will allow us to allocate more resources to the provinces,’ he maintained.

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