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Viewpoint 64: Beyond the NFC Award; December 31, 2009

December 31, 2009: A viewpoint titled ‘Beyond the NFC Award’ by Sania Nishtar has been published in The News International. Full text is accessible at View Points
Context: The National Finance Commission Award is an important tool of fiscal federalism, which can pave the way for better federal-provincial relationships. It can increase financial resources for the provinces and can be an important health financing intervention. This comment explores the strategic imperatives and opportunities in this regard.

Beyond the NFC Award

Published in The News International on December 31, 2009:

The National Finance Commission (NFC) will be announced by the Prime Minister in Gawadar today. Felicitations are due not only for the amicable coming to fruition of a process fraught with long-drawn disputes, but also for the innovations which have been introduced with regard to a set of new criteria. Indeed, the dispensation of vertical and horizontal distributions from the divisible pool have ensured a better deal for the smaller provinces, and can pave the way for better federal-provincial and inter-provincial relationships.

Before some of the constraints that stand in the way of achieving these objectives are reviewed, the issue of resource transfers should be examined more closely. Systemic resource transfers are not confined to the NFC, but occur at three other levels — from the provincial to the local government; from the federal to the local government and from the local to another tier of the local government. There must be similar issues at these levels that are never brought to the fore, perhaps, since the local stakeholders do not wield the same influence as the provincial political hierarchy.

Additionally, there are random methods of resource transfers such as grants, which must be taken into account. This becomes important as the government is increasingly making use of debt swaps to free up resources, and in view of the envisaged inflow of aid under the new Kerry-Lugar arrangements. Although there will be no subventions and grants for provincial governments under the new NFC, given the 56 per cent provincial share from the divisible pool, a policy relating to random transfers will nevertheless bring greater clarity.

Now that the provinces are on their way to becoming more empowered, the question of other provincial taxes, which are to be levied and retained by the provinces such as the agriculture tax, should also be addressed squarely. There are political and capacity constraints in this regard. The extent to which the feudal dominated provincial assemblies will make headway in that direction remains to be seen.

An increase in financial resources for the provinces must bring to bear the poor correlation between total spending and intended outcomes, particularly development outcomes. Unless there are parallel efforts to improve returns on spending, not much will be achieved.

Several factors are known to impair the ability to expend; these include excessive centralisation of operational decision-making, onerous financial and administrative procedures, lack of accountability of decision-making delays, and limited capacity to plan and implement. An allied issue relates to quality of expenditures — tracking of budgetary fund flows in the public sector shows a predominance of expenditures in May and June before the financial year ends, with non-development budgets predominating. These constraints need to be addressed through financial management reforms.

In terms of returns on investments, the effect of corruption on compromising public investments in a highly-constrained environment must be taken into account. Leakage of funds from the system is an outcome of various forms of corruption. These occur because of poorly-managed expenditure systems and poor fiscal controls over flow of public resources.

Procurement graft is rampant and is fully institutionalised in many areas in provincial domains. It is, in fact, one of the ‘easiest’ ways of pilfering resources from the system. The recent attention to this systemic fault line should lend impetus to fully institutionalising procurement reforms.

In the same vein, it must be recognised that the there is an additional responsibility that the provinces now have with regard to generating surplus cash balance in order to meet budget deficit targets stipulated by the IMF, in view of the limitations that the federal government now faces, due to a decrease in the size of its share in the divisible pool.

Coming back to the NFC, the importance of building capacity to deal with the matter on an on-going basis must be concomitantly underscored. Although the decision on the NFC award has been remarkably well handled this time round, it is not a guarantee that it will always be the case in the future, which is why institutional capacity is needed to track progress and inform policy in order to guard against any future deviations as has been the case with NFC awards in the past. Inclusion of net hydel profits and royalties and excise duties on oil and gas in the divisible pool, which caused federal provincial tensions for years, despite the clear constitutional stipulation that these should be dealt with outside of the NFC award, is another example, while reflecting back in history. Yet another is that of implementation of the GST on services by the federal government, revenue from which under the constitution should have accrued entirely to the provincial governments. Although these matters are now history given that they have been admirably resolved under NFC 2009, they have nevertheless set a precedent in the past.

Then there is the long-standing issue of tax devolution, towards which the provinces would like to move and policy issues with regard to pros and cons of tax devolution that need to be balanced. All these and other complex issues need policy guidance on an on-going basis. By creating a dedicated intuitional resource for on-going policy guidance to strengthen fiscal federalism, NFC 2009 can have a sustainable impact on other awards in times to come.

The writer is the founder and president of the NGO think tank, Heartfile. Email: sania@heartfile.org

Viewpoint 63: Road to anti-corruption reform; December 19, 2009

December 19, 2009: A viewpoint titled ‘Road to anti-corruption reform’ by Sania Nishtar has been published in The News International. Full text is accessible at View Points
Context: After the Supreme Court’s ruling on the legal validity of the National Reconciliation Ordinance, interest in anti-corruption reform has burgeoned. This comment emphasizes why anti-corruption reform can be the entry point to addressing the many crises that the country is plagued with including poor service delivery and therefore, an under-performing health sector.

Road to anti-corruption reform

Published in The News International on December 19, 2009:

In a landmark decision on December 16, the Supreme Court has ruled on the legal validity of the National Reconciliation Order (NRO) and has termed it void ab initio for being ultra vires of the Constitution. In layman’s terms, the NRO stands null and void since its inception and all benefits acquired, accrued or incurred under it stand withdrawn. This decision is a very important cog in a chain, which is paving the way for strengthening the moral basis of anti-corruption reform in Pakistan. The sequence of events began with a series of Suo Moto actions by the Supreme Court, which played an important role in strengthening the societal political culture—a demonstration of which was part of the lawyers’ movement. Subsequently, the media’s drive to bring corruption as a leading public debate to the fore has also been commendable. The role of successive governments, which allowed a free media to thrive—reservations notwithstanding—should additionally be acknowledged. It appears that these events along with the realization that the need for clean and competent hands on the governments reigns are critical to alleviating the day-to-day crises facing the common man, can be key to lending impetus to holistic anti-corruption reform.

Why the emphasis on anti-corruption reform when the country suffers from so many crises—the question may be posed? The answer to this is embedded in some key realizations.

Corruption relevant to state governance has many shades—financial, ethical and procedural. Closely related to these are mal-governance, inefficiency and ineptitude, which in the absence of mechanisms to compel accountability can be equally damaging. Each of the problems that we see plaguing our nation today is a manifestation of one of these.

Over the years, we have seen the emergence of a form of governance where systemic manipulation was fast becoming well-ingrained; where state capture by vested interest groups and undue influence to shape state policies, laws and regulations, was becoming common place. In these environments, procurement graft was becoming institutionalized, preferential treatment and nepotism guided human resource decisions, and patronage and support for debt writing off, tax exemptions and other favours was fairly common. In general, decisions were usually not grounded in evidence and misuse of authority was fast gaining acceptance.

This style of governance steadily eroded the capacity of state institutions over time; it fostered public-private collusion and furthered vested economic interests of the powerful elite. There was massive diversion of state resources for personal gains and a growing trend towards cartel activity, which manifested itself in frequent commodity shortages of the kind witnessed over the last few years. These malpractices helped to further strengthen Pakistan’s growing informal and black economies, which thrived on smuggling, trafficking and a range of financial crimes.

As these practices got firmly ingrained, state resources got channeled to the well-connected through patronage and political links were furthered, establishing a vicious circle. Regulatory capture became pervasive and procedures were circumvented to settle police cases, change land documents, evade tax and get permissions and licenses. The ability of state institutions to target welfare was weakened. Moonlighting in the private sector and levying of charges for services that were meant to be provided by the state for free became common in the social sectors. The resulting outcomes were devastating—the rich-poor divide was augmented, the society become polarized and impoverished masses became exploitable in extremist hands. Upright politicians and state functionaries were weeded out of the system and reforms were held hostage. We were left with frail governance, weak political systems and a thriving informal economy.

All this may pleasantly be up for a change now! By upholding constitutional stipulations, the judiciary, and through its open confrontation of this menace, the media have lent impetus to a burgeoning transition. The two pillars of the state—judiciary and the media—have played their respective roles; it is now imperative that the two other pillars—legislature and the executive—also play their part in this transition. Anti-corruption measures necessitate deep-rooted systemic reform and it may not be possible to do everything at once. However, they are some critically important next steps, which need to follow.

The legislature must do five things: one, in the forthcoming 18th Amendment to the Constitution, it must aim for the right separation of powers and structure appropriate institutional checks and balances between the executive, judiciary and the legislature and ensure that constitutional restraints upon the elected government are in order. Second, it must revisit the freedom of information law—the oxygen of democracy—which has to do with access to information and disclosure, which can enable public discourse in larger national interest on issues of governance. Pakistan’s existing Freedom of Information Ordinance, 2002, which is still in force, has many weaknesses; some of these such as the excessive broad regime of exceptions and the restrictive approach to the definition of public record need to be addressed through appropriate amendments. Third, the Parliament must strengthen its Public Accounts Committee and empower it as an engine of oversight with active engagement with the civil society and expert groups. Fourth, it must revisit the Competition Commission law to enable the Commission to function independently as it is playing an important role in creating a level playing field for businesses and weakening economic interests that promote state capture. Finally, the legislature must finalize a legal and institutional accountability framework for the country. Weaknesses of the Holders of Public Offices Act 2009, in terms of the envisaged Accountability Commission’s prerogatives, the flexibilities and space for maneuverability, its structure in relation to purported independence, moreover the fragmented institutional design being structured under the bill’s aegis, has been the subject of great debate. These concerns need to be addressed in a new legal and institutional dispensation.

Finally, there is a set of imperatives for the third pillar of the state—the executive, or the government. Theoretically speaking, there are many things in that fold that need to be undertaken—revival of the National Anti-Corruption Strategy, strengthening of several institutions that have a role to play, mainstreaming technology to plug leakages, institutional changes in ministries that would separate policy making from regulation and implementation to reduce space for collusion, revival of the many donor-supported projects initialized by several governments, which can have a knock on effect on transparency, civil service reform, changes in public finance management, procurement reform and many other areas. It is accepted that it would not be possible for the executive to commence work on all of these areas at once. However, some strategic measures need to be taken to pave the way for broader reform and keep the momentum going. By doing just two things the executive can signal a strong commitment to change. One, upholding merit and creating incentives for integrity in public service at all levels—the cabinet and bureaucracy and two, assisting with needed reform in the judicial system itself.

The road to anti-corruption reform is long and winding but with the needed measures at the right time, progress is possible. As a nation we have long under-estimated and ignored the cost of corruption and mal-governance. We may be familiar with the staggering costs of commissions, revenue lost due to crony privatization, political patronage, tax evasion and the shadow economy but what we don’t recognize is the erosion of the social fabric and ethical and democratic values it has caused and the risks it poses to national security and peace. For now the judiciary has played a watershed role in what can be a burgeoning transition. Its coming to fruition will depend on how well the two other pillars of the state play their role to uphold accountability, transparency, professionalism and neutrality.

The author is the founding president of Heartfile. sania@heartfile.org

Viewpoint 62: The federation and provincial autonomy

December 12, 2009: A viewpoint titled ‘The federation and provincial autonomy’ by Sania Nishtar has been published in The News International. Full text is accessible at View Points
Context: The Balochistan package is an instrument of provincial autonomy, but as a package of measures, has its inherent limitations with respect to achieving the objectives stated therein. This comment explores how and why that is the case.

The federation and provincial autonomy

Published in The News International on December 12, 2009:

The Balochistan package, the implementation of which the Prime Minister envisages finalizing by December 15, has been received with views on both extremes of a spectrum. The ruling stakeholders term it as a significant milestone whereas the Baloch nationalists have rejected it outright.

From a review of the package it seems that the Parliamentary and Cabinet Committee mandated with the task of developing the package has carefully gone over the various bones of contention and has made an effort to make some allowances in the five-tiered package, without disturbing the current relationship between the federation and the federating units. Hence, some additional space has been created for Balochistan in the administrative, economic and political realms, with commitments to pay outstanding dues on account of royalties—a major concern in inter-provincial relationships—and an affirmation that the Parliamentary Committee on Constitutional Reform will review matters relating to provincial autonomy in the 18th Amendment.

If this package as its name suggests, is the beginning of careful strategic thinking and long term planning towards granting provinces the due share of autonomy, then it should be considered as the step in the positive direction. In isolation however, each of its components have their limitations, as the objective intended to be achieved through the Balochistan package is deeply interlinked with the issue of provincial autonomy and the relationship of the federation with its federating units. In this equation, the federal government’s mandate, the fate of the Concurrent List, discussions around the National Finance Commission (NFC) award, matters relating to provincial prerogatives with regard to sharing of resources and taxation and other prerogatives assume great importance. These must be addressed in a coordinated and step-wise manner.

First, autonomy must be defined in the context of fiscal and political federalism in Pakistan. Over the years, many calls have drawn attention to the subject, most of them subscribing to an extreme notion of autonomy analogous to what was envisaged in the 1940 resolution, which defined Pakistan as “a federation comprising of autonomous units, which shall be completely sovereign”. Views articulated in the Declaration of Autonomy of the Federating Units signed on August 2, 1986 by the leaders of the Movement for the Restoration of Democracy, also called for an extent of autonomy in which all, except four subjects—defence, foreign affairs, communications and currency—were to be delegated to the provinces. Many Baloch nationalists still subscribe to this view. The question is, do these four subjects guarantee a viable federation for Pakistan? What else is needed by way of the Federal Government’s mandate to fulfil the concept of a unified Pakistan and promote equity in development across provinces? Can the desired level of provincial autonomy be granted by implementing the five-point constitutional changes articulated in the Balochistan package, relating to abolishing the Concurrent List, the Local Government Ordinance 2001 and Police Order 2002 and effective implementation of Articles 153-160 of the constitution and by strictly adhering to the design of the federal-provincial relationship as stipulated in the 1973 Constitution, which as the Balochistan package acknowledges has been “circumvented” in the past? Or should we completely digress from the quantum of provincial autonomy as endorsed by the 1973 constitution? How can we achieve the dual goals of granting the people of Balochistan the right to self-rule and control whilst supporting national unity at the same time? These questions need careful thinking with a broad-based consensus on the directions to be pursued.

Second, the Federal Government’s mandate must be clearly defined. Many believe that the current federal system has been designed on the legacy of centralized control—a hallmark of the colonial period. In this arrangement, the federal government has been stretched thin with tasks that could better be taken in the provincial fold. Many also believe that there is a major disconnect between prerogatives to generate resources and expenditure responsibilities. It has been frequently cited that the Federal Government generates 93% of the resources and has 72% share in total expenditures; conversely, the provinces are left with 7% resources and account for 28% of the expenditure. Of the five expenditure heads of the federal government, the two that are of direct relevance to the question of provincial autonomy are the Public Sector Development Program (PSDP) and the cost of running the civil government. There are many subjects under the PSDP, which can better be assigned to the provinces. If there is a unanimous consensus to do so, the costs of running the civil establishment in Islamabad can be scaled down through structural institutional changes; the concurrent list can then correspondingly be pruned and the size of the National Finance Commission award for the provinces will therefore increase.

Third, the issue of the NFC Award is closely interlinked. Out of the seven NFCs since the 1973 constitution, only four have come up with additional measures. These—relating to the composition of the divisible pool, inclusion of taxes and revisiting the provincial share—although important in their own right, do not comprehensively address issues fundamental to fiscal autonomy of the provinces, which centre on taxation rights and mechanisms to assign permanent sources of revenue, particularly with regard to control over natural resources in line with what has been stipulated in Article 161.

Decision on the next NFC award is due later this week. Although there are inherent difficulties in balancing the varied demands of the provinces, there are ways in which provinces can be empowered to generate and retain their own revenue, whilst reducing concentration of revenue collection at the centre through major tax-heads, albeit without jeopardizing the core functions of the federation. In addition, sensible revenue collection criteria, which indicate economic activity in the province and hence revenue distribution can be devised and given weights in relation to criteria for distribution from the divisible pool. This can be supplemented by other criteria—indeed the provinces have a long term demand to include criteria other than the sole criterion of population as a basis of provincial allocations from the divisible pool.

Fourth, let’s not forget that the core purpose of provincial autonomy is to enhance public sector effectiveness. That in turn is closely linked to how the system of local governance will be shaped—an area in which there is pervasive uncertainty.

It is evident therefore that the issue meant to be addressed through the Balochistan Package needs a consensus-driven long term plan, which can be implemented in a coordinated stepwise manner. As this requires many institutional changes, immediate implementation of drastic and ad hoc measures should be avoided as it can lead to disenchantment in the administration particularly at the federal level, which can be detrimental at a time when the country is undergoing many different crises. But at the same time, the issue of provincial autonomy should not be taken lightly. In fact the determinants of the country’s split in 1971 were rooted in inattention to the subject. It is imperative to devise a long term solution acceptable to the provinces to ensure that the provinces have more space and control, whilst at the same time strengthening the foundations of the federal structure and inter-provincial harmony. However, in order to get things going in a coordinated fashion, long-term visionary thinking, strategic planning, and consistency of policy direction is needed over time. In tandem, careful and unbiased oversight has to be ensured so that capacity development and transparency-promoting reform is pursued in the provinces in parallel with granting of autonomy and responsibility. A “package” of measures, no matter how well-intentioned, has inherent limitations in achieving this long-term objective.

The author is the founding president of the NGO think-tank, Heartfile. E mail: sania@heartfile.org