Proposals for NFC 2001

June 18, 2001
1. Dr Hafeez Shaikh,Minister of Finance SindhKarachi, Sindh
2. Mr. Abdullah J MemonMember NFCKarachi, Sindh
Dear Dr Shaikh and Mr. Memon,
Subject: Sixth National Finance Commission (NFC)
I understand that the federal government is convening the first meeting of the National Finance Commission (NFC) on July 8 next to work out a fresh arrangement for national resources distribution between the federation and the provinces and among the provinces for next five years from 2002-2003 to2006-2007. You must be busy with preparation of Sindh case,
The coming round of discussion will be particularly important in context of the devolution plan. In view of its forthcoming meetings, I have asked members of Sindhi computer nets to come forward with ideas for NFC award. Several people have expressed interest and provided ideas. I am particularly thankful to Mir Atta Mohammad Talpur for providing useful material.
From our various discussions, I know that both of you are already familiar with (a) the history of the awards to date; (b) exact data for revenue, expenditure, and allocation; and (c) past injustice to Sindh. Accordingly, I will make limited use of data in this note and only focus on ideas, which may assist you in strengthening Sindh’s case.
In Pakistan, population has been the one and almost only criterion for NFC Award. The formula based on population alone is inherently unfair. One reason is that the expenditure is not incurred exactly in proportion to the population. For example, Irrespective of population, every province has one governor, one chief justice, and one IGP. Therefore, by and large, the expenditure on establishment is not exactly in proportion to population. Further more, development expenditure costs significantly more per head in the province with least population. A kilometer of road constructed in Balochistan may barely benefit 100 persons, whereas in Punjab, it may benefit 1500 persons. The cost per person in Punjab is the lowest.
The last NFC award was particularly damaging to Sindh. Based on data available to me, in last four years, 1997-98 to 2000-2001 Sindh received Rs 57 billion less than share projected in the NFC. Projected total share was Rs 204 billion whereas actual receipts have been Rs 147 billion only. All projections of revenue generation by NFC proved wrong and totally far removed from realities. I am sure that you must be investigating the reasons for the shortfalls and taking steps to ensure that basis for the next award are more reasonable.
Based on last year’s data, crippling effect of this shortfall of resource transfer to Sindh include (1) Mounting debt burden of Rs 106 billion, (2) Over draft liability towards State Bank of Pakistan to the tune of Rs 4.9 billion, (3) the over draft figure touched alarming Rs 11 billion in July 1998, (4) Interest being paid back to federal government on its outstanding dues (Rs 12 billion) every year. Other expenditures, which needs to be added to this include (1) Salary of 450,000 employees: Rs 26.32 billion, (2) pensions of retired employees: Rs 3.26 billion, (3) repair / maintenance of government owned equipment, machines, automobiles: Rs 1.67 billion, (4) commodities and services: Rs 8.64 billion, and (5) subsidies: Rs 4 billion. Sindh government is, therefore, hardly left with any money to take up any development project in the province.
The fifth NFC award is the primary cause of Sindh's current bankruptcy andAbsence of any significant development in the last four years. As noted by the recent Task Force on Economic Revival of Sindh, (1) There has been virtually no development in Sindh since 1996, (2) Maintenance of roads, buildings, bridges, canals, irrigation network has not been carried out,(3) Thousands of new primary schools built under Social Action Program are still inoperational because of lack of funds, (4) Basic health centers, drainage and water supply schemes had met the same fate, (5) Allocations to police stations for their operations has been so insufficient that they have been meeting greater chunk of fuel expenditure of their mobile vans through their own graft money, (6) Thousands of contractors of nation building departments have not been paid for last several years, (7) Continuous ban on purchase of durable goods or creation of new posts for more than five years resulting in widespread unemployment. (8) Inadequate funds have been forcing Sindh government to resort to large-scale retrenchment of public sector employees resulting in development of sense of deprivation and alienation.
Using just one international example, it may be noted that in sharp contrast to Pakistan, the Indian finance commission gives only 10 percent weight to population and provides 32.5 percent share in resources to states. Also the income tax revenues are transferred entirely to the states. Effort has been made in India to promote equity among the states and the criteria have depended on one or more of the following: (1) size of population (2) index of infrastructure (3) index of backwardness (4) percentage of poor in the states (5) distance of state's per capita income from the per capita income of the richest state. Revenue collection was also provided due weight in the 10th Finance Commission in India. The report of 11th Finance Commission in India has also suggested revision of royalties on minerals.
The current Sindh government has obligation to demand change in formula. Evidence shows that some Sindh governments have made good proposals in the past, but they have been rejected. The current government must make the case forcefully.
We understand that in 1996, the then government in Sindh had set-up a task force on NFC to prepare Sindh's case. The recommendations of that task force remain valid. They may be updated to reflect the situation on ground. For example: (1) Sales tax - a consumption tax, universally recognized as provincial tax was asked to be transferred to provinces to make them financially viable and autonomous in real sense,(2) Collection of taxes and revenue generation was asked to be assigned weight in the distribution, (3) It was recommended that Sindh should be given appropriate share out of the benefit accruing from the use of its seaports. Seaports, according to the task force, are natural resources of Sindh on the same basis as the hydel resources of NWFP. Since NWFP is provided with share of profit from its hydel resources, Sindh should be provided share from use of its seaports, (4) Specific genuine needs: law and order problem of Sindh, population density, economic under-development should also be considered. (5) Specific needs arising out of large migrant community—from other provinces and elsewhere such as Afghanistan, Iran, Bangladesh must be met.(6) Specific needs arising of clamities such as drought, earthquake, seawater intrusion etc must be met.
In short, we feel that the new formula must include: (1) Due weight to revenue generation and collection, (2) Backwardness (3) Extraction of natural resources, (4) Share in revenue collected under tax amnesty scheme; (5) Share in privatization proceeds.
As a bottom line, the NFC award must enable the provincial and local governments to (a) meet all of their financial obligations, and (b) to achieve a substantial economic development to provide basic human needs for all people of Sindh.
Best regards,Yours sincerely,
Ali Nawaz MemonMember, Task Force on Economic Revival of Sindh9501 Falls Bridge LanePotomac, Maryland, USA301-983-3467