The NFC puzzle

The federal government’s recent move to reconsider the weightage of population size in the NFC Award will have added another factor to the already existing debate on the country’s resource distribution framework. Finance Minister Aurangzeb’s statement about examining the "use of population as a criterion for the distribution of resources holistically" raises valid concerns about the existing formula, which heavily prioritises population over other crucial factors such as poverty levels, revenue generation and geographic area. The current NFC Award framework, which assigns an overwhelming 82 per cent weightage to population size, has inadvertently incentivised rapid population growth while sidelining other development indicators. This imbalance has had serious repercussions on the state’s ability to provide adequate healthcare, infrastructure and social services. With an overstretched and underfunded health system, provinces have failed to adequately address emerging diseases and healthcare crises. Despite constitutional provisions mandating a fresh NFC Award every five years, successive governments have failed to fulfill this requirement since the expiry of the last award in December 2014.

Provinces, particularly Sindh, have repeatedly raised concerns about the NFC Award and its impact on resource allocation. While the 18th Amendment and the NFC Award were steps in the right direction -- granting provincial autonomy and reducing tensions between the centre and smaller provinces -- there are loopholes that some argue benefit provinces at the federation’s expense. Consequently, successive finance ministers have deliberated on reforming the NFC formula to ensure a more sustainable and equitable distribution of resources. One of the most glaring issues is the provinces’ lack of revenue generation. Despite receiving a significant share of national revenue, they have made minimal efforts to collect taxes or develop independent revenue streams. Comparisons with India reveal a stark contrast -- smaller cities there generate more property tax than Pakistan’s largest province. This falls on the failure of provincial administrations to implement effective tax policies, particularly in sectors like agriculture, real estate and retail. Rather than solely relying on their NFC share, provinces really need to take proactive steps to strengthen their revenue base and contribute meaningfully to the national GDP.

To address this shortfall, provinces need to empower local bodies, ensuring they have the authority and resources to manage expenditures and drive revenue generation. A robust local governance structure would not only enhance fiscal responsibility but also facilitate better service delivery at the grassroots level. The criticism directed at provinces is not unwarranted, and it is now up to them to demonstrate fiscal responsibility by improving revenue collection mechanisms. Some politicians perceive any discussion on NFC reform as an attack on provincial autonomy, but such debates should not be misconstrued as attempts to reverse the 18th Amendment. Rather, the goal is to introduce pragmatic changes based on objective analysis. If provinces were collecting sufficient revenue, this debate would not have arisen. Moving forward, resource allocation must factor in a more comprehensive set of indicators, including revenue generation, tax collection, poverty alleviation, climate change resilience, healthcare improvements and education sector advancements.