Devolution in Pakistan: Issues and way forward

Any NFC award, going forward, should try to rationalize the concerns of centre and provinces, in terms of fiscal burden sharing given their individual responsibilities. Also, to more sustainably allay these concerns, revenue generation responsibilities of each should be emphasize, so that the size of the cake or divisible pool also gets significantly enhanced.

devolution in Pakistan

In an article ‘Decentralization: a central concept in contemporary public management’ Christopher Pollitt defines decentralization as an ‘umbrella concept [which means] a division of authority from few to the many.

The word has an interesting evolution, as for instance, highlighted in a 1961 published article ‘Delegation and Autonomy’ and written by A. Macmahon as follows ‘It is impossible to standardize the usage of the word decentralization by seeking to give it meanings that would be accepted universally.

The English language took the word from Latin… it is a word that is not confined to public affairs… [and] is used in every walk of life. It must be accepted as a word of innumerable applications. Throughout all of them, however, runs a common idea, which is inherent in the word’s Latin roots, meaning “away from the centre.” ‘Devolution’ is a type of ‘administrative decentralization’.

Read more: 18th Constitutional Amendment: Divine document?

The figure below highlights the main aspects of decentralization is this regard. About devolution, the World Bank indicates ‘When governments devolve functions, they transfer authority for decision-making, finance, and management to quasi-autonomous units of local government with corporate status.

Devolution usually transfers responsibilities for services to municipalities that elect their own mayors and councils, raise their own revenues, and have independent authority to make investment decisions. In a devolved system, local governments have clear and legally recognized geographical boundaries over which they exercise authority and within which they perform public functions. It is this type of administrative decentralization that underlies most political decentralization.

In the case of Pakistan, the main usage of decentralization, indeed, identifies with this underlying theme of the term, that is, of shifting of power. Hence, the primary focus and evolution have taken place in the form of administrative decentralization or devolution, whereby there has been a shifting of power and resources from the centre to the provinces.

The provincial share in divisible pool of resources, increased from 47.5 percent to 57.7 percent for fiscal year (FY) 2010/11. This means that the provincial share increased from Rs. 655.3 billion to Rs. 1,033 billion

While 18th Amendment and the 7th NFC (National Finance Commission) Award stand as important milestones in the terms of significant transfer of power and resources from the centre to the provinces, yet the next phase of transfer from the provinces to local governments has remained a weak link in the ultimate implementation of the said amendment. This is where the heart of the issue lies.

Another issue that has surfaced over the last decade or so, since around the time of the passage of this amendment, is that the centre, under various governments has found itself left with a lack of fiscal resources, and have to rely on borrowed resources from the outset – after award to the provinces – after paying for such federal items as debt servicing and defence expenditure; while at the same time it has other responsibilities in addition to those two items, which include, among others, development expenditure, civil administration, grants, pensions, and subsidies.

There is a discussion on either side of this situation, whereby on one side the opinion is that there should be more burden-sharing by provinces, specifically in relation to the above two items that the provinces stand significantly benefited from.

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On the other hand, the argument is that provinces have a lot on their plate after the devolution of responsibilities from the federal to the residuary list of subjects – details of which will follow in the article – and therefore, the centre should improve upon its tax collection effort rather for meeting its resource constraint issue.

What is missing though in this whole discussion as such, is the focus on improving the efficiency of expenditures, so that revenues are better utilized. In turn, there is hence, more concern on the allocation of resources, rather than the better usage of those resources, through better public institutions, underlying organizations – both public and private, and ones where both collaborate – and markets.

Hence, while parliamentarians or policymakers, both in centre and in provinces, show uneasiness in terms of allocation sizes of resources, given the slow pace of reform in the mentioned areas, they seem to be less concerned in legislating and getting implemented reforms in this regard.

The previous 7th NFC Award was signed and then promulgated on by the President of Pakistan in 2010. As per the provisions of Article 160 of the Constitution, the Award was to be valid for five years from 2010-11 to 2014-15

Nevertheless, it is indeed important for both better development, and for improved democratic roots, that the second phase of the 18th Amendment gets implemented, and local governments are made viable both in terms of power and resources.

One of the most glaring changes made through the 18th Amendment, and which led to transfer of many subjects, for instance, health and education (see Table 1 for complete list) to the provinces, was the abolishment of the ‘concurrent list’ of the Constitution.

devolution of Pakistan

Another important change made in the Constitution under the 18th Amendment, is the insertion of Article 167(4), whereby the provinces stand authorized to raise international or domestic loans, after obtaining approval from National Economic Council (NEC); where NEC will take such a decision, keeping in view the country’s overall borrowing status.

The inclusion of provinces in terms of raising loans, could allow reaching a more competitive markup rate, since unlike before, through this clause the federal government entered into a competition over raising loans with the provincial governments.

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Moreover, opening up of this avenue for provinces also allowed them to save on repayments in the shape of more competitive mark-ups on direct borrowing, which could in turn be possibly lower than ones received on re-lent loans previously from the federal government.

As per the 7th NFC Award, the provincial share in the divisible pool of resources increased from 47.5 percent to 57.7 percent for fiscal year (FY) 2010/11. This means that the provincial share increased from Rs. 655.3 billion to Rs. 1,033 billion.

It may be pertinent to indicate here that the divisible pool consists of federal taxes in income tax, sales tax, customs duties, CVT, and FED net of gas. Table 2 highlights the breakup of total provincial share.

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It could be noted here, that in the absence of 7th NFC Award, the provincial share would have only increased to Rs. 811.6 billion, instead of Rs. 1,033 billion allocated under the 7th NFC Award, which stood as a significant increase in favour of provinces at Rs. 222 billion. Table 3 below highlights this.

devolution of Pakistan

Having said, it could be seen, therefore, that with the increase in the provincial share, the share of the development budget of the federal government stand decreased; which in turn meant that the share of the provincial development budget increased by the same amount.

Given, a number of subjects have been moved to the provinces through the abolition of the concurrent list, the increase in their share make sense. Table 4 highlights the impact of 7th NFC Award on the development budgets of federal and provincial governments, respectively.

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Given the de facto existence of the 7th NFC Award, the same allocation difference in development budget continues to exist over the years. The above discussion indicates the impact of the 7th NFC Award in terms of ‘vertical distribution’ between the centre and provinces, whereby it increased by Rs. 222 billion to Rs. 1,033.6 billion in FY 2010/11.

At the same time, a significant change that was made in terms of the 7th NFC Award was by changing the formula for the ‘horizontal distribution’ among province. Hence, the criterion for provincial distribution was enlarged from just‘population’ to ‘multiple indicators’, which included population, poverty/backwardness, revenue collection/generation, and inverse population density. Table 5 indicates weights of individual indicators.

devolution of Pakistan

Having understood the significant features of the 18th Amendment, and the 7th NFC Award, and also the main issues currently being raised in this regard, it is therefore important to realize that consensus needs to be reached over an NFC award to address these issues.

To understand some of the developments in reaching consensus on another NFC award, it is important to cite an article ‘The 9th NFC’ published early last year and written by Dr. Hafeez A. Pasha, where it is indicated that ‘The 9th NFC is scheduled to have its first meeting on the 6th February.

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The previous 7th NFC Award was signed and then promulgated on by the President of Pakistan in 2010. As per the provisions of Article 160 of the Constitution, the Award was to be valid for five years from 2010-11 to 2014-15. However, in the absence of consensus on the part of the 8th NFC, the 7th NFC Award has continued to be operative up to the current financial year 2018-19.

In effect, the de facto tenure has already been of nine years. Clearly, 9th NFC is to complete the task that reflects the changing nature of inter-governmental fiscal relations in the country and the relative economic position of the four Provinces in a new Award.’ Earlier, this year, discussions on 10th NFC Award reportedly began.

Any NFC award, going forward, should try to rationalize the concerns of centre and provinces, in terms of fiscal burden sharing given their individual responsibilities. Also, to more sustainably allay these concerns, revenue generation responsibilities of each should be rationalized, so that the size of the cake or divisible pool also gets significantly enhanced.

Read more: Why the low tax-intake in Pakistan is not a hot issue?

Moreover, in the next NFC award, arrangements must be internalized, which should ensure that provincial finance awards are also made so that resources reach the lower tiers of government in the provinces. Overall, any devolution should strike a healthy balance between decentralization and centralization, so that accountability and responsibility could be properly exercised and assigned, both through independent regulators and above all by the electorates.

Dr. Omer Javed holds a Ph.D. in Economics degree from the University of Barcelona and previously worked at the International Monetary Fund. Before this, he did MSc. in Economics from the University of York (United Kingdom), and worked at the Ministry of Economic Affairs & Statistics (Pakistan), among other places. He is author of Springer published book (2016) ‘The economic impact of International Monetary Fund programs: institutional quality, macroeconomic stabilization, and economic growth’. He tweets @omerjaved7

The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space. 

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