THE seventh National Finance Commission (NFC) award was recently renewed for a year. Deliberations on the eighth award have already begun. As we transition to the new NFC, it is important to take stock of the achievements and failures of the current award, and its impact on the future of development policy and Pakistan’s efforts to achieve the Sustainable Development Goals.

The seventh NFC award was unprecedented in the history of Pakistan. First, it generated an unparalleled political consensus on the NFC process. The political process which underpinned it was participatory and inclusive, with a broad buy-in characteristic of a truly democratic development process. Second, it introduced much-needed structural changes to how funding was distributed among the provinces. For the first time, the criterion for distribution was not based on population alone but on multiple indicators.

Resource distribution is widely used as an instrument of fiscal equalisation to address socioeconomic inequalities. For example, the Indian Finance Commission (FC) has been constituted 14 times since independence, compared to four conclusive NFC awards in Pakistan. The regularity of awards by the Indian FC is largely thanks to being delinked from population. In the spirit of fiscal equalisation, the FC awards assign significant weighting to deprivation or ‘backwardness’ measured through poverty, geographical remoteness, per capita income, etc. Other countries, such as Germany and Canada, also use multiple criteria successfully. The introduction of multiple criteria in Pakistan’s seventh NFC award was thus welcome.

Some analysts believe the use of the ‘backwardness’ or poverty indicator for the award creates perverse incentives for provinces — to increase their share, provinces will want to remain poor or at least appear poor — and propose replacing it with poverty reduction. However, we believe the issue is not the criterion used, but the need to develop a proper monitoring and evaluation system to assess local impacts of development expenditure.

The seventh NFC award was unprecedented.

The seventh NFC award was expected to increase federal transfers by 24pc from the base year of 2009–10. While actual federal transfers increased by 22pc, due to revenue shortfall provincial development expenditure increased by only 13.6pc against a 37pc projection. The provincial current expenditure, on the other hand, increased by 16.4pc against a projected 14pc. This suggests that increased funds did not proportionally convert into development expenditure. Even poverty reduction expenditures as a percentage of GDP have remained unchanged at 7.6pc. While it is encouraging that education and health are top priorities at both the provincial and federal levels, other sectors including environment, agriculture, and climate chan­ge are now lower priorities for the provinces in the post-seventh NFC award period.

The impact of the seventh NFC award has also been weak. For example, Punjab has shown only a marginal increase in the proportion of primary school-aged children enrolled in an appropriate level of education, the net primary enrolment (NPE), from 62pc in 2008–09 to 64pc in 2013–14, whilst Khyber Pakhtunkhwa has risen from 52pc to 54pc. In Sindh and Balochistan the NPE has actually declined, from 54pc to 48pc and 44pc to 39pc respectively. These insignificant changes point towards a critical issue, that is, increased resources are simply not converting into enhanced social sector outcomes.

The reasons for this include weak public administration capacity to spend adequately and, importantly, the dormant status of the Provincial Finance Commission (PFC) awards. The share of local governments is very low — it is around 24pc for Punjab, 6pc for Sindh and 4.6pc for KP. The lack of elected local governments for alm­ost a decade, has vir­­­t­u­ally stopped the process of decentralisation.

The eighth NFC award must build on the foundation laid down by the seventh NFC award and encourage provinces to establish well-functioning PFC awards. The multiple indicator formula for horizontal distribution of resources must be retained, with poverty/backwardness remaining a key criterion. The NFC process should consider integrating regular reporting of the Multi-dimensional Poverty Index and Human Development Index developed by the government of Pakistan with support from the UNDP. This will not only provide a measure to assess the impact of increased expenditure locally but will also establish baselines for subsequent finance commission awards.

Recognising that this may need constitutional amendment, the NFC process should also integrate the three administrative regions — Azad Jammu and Kashmir, Gilgit-Baltistan and Fata — but not at the cost of provincial shares. Given the needs of the temporarily displaced people, Fata needs urgent attention. The continuation of the NFC process will strengthen Pakistan and enhance the functioning of the many layers of government whose productive participation is crucial for development and inclusive growth.

The writer is country director of UNDP in Pakistan.

Published in Dawn, July 23rd, 2015

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