World Bank and NFC Award

A RATHER damning indictment of the seventh NFC Award has just been published by the World Bank in a study titled Strengthening Fiscal Federalism in Pakistan. The study plugs a crucial gap in our understanding of the impact that the NFC Award has had on the state’s ability to function and deliver social services. The findings are not flattering for the performance of the provincial governments across Pakistan, since 2009.

In typical World Bank style, the authors generously pepper the report with observations about the strengths that the NFC Award has brought, noting it “provides predictability and protects provincial revenue shares”, “supports provincial autonomy” and is “consensus-based”. Then it pivots, usually with “[h]owever, from a technical perspective…” to the critical commentary.

The critical vocabulary is notably blunt for a World Bank document: the mechanism rests on “an arbitrarily determined pool of resources … distributed … based on multiple factors with again arbitrarily determined weights”; the seventh Award produced “windfall gains to provinces”; “financing has not followed function”; and the indicator weights “reflected a negotiated outcome rather than application of a clear legal or technical framework”. The Award, it says, has been “a material contributor” to the “structural federal fiscal deficit”.

The frankness here makes for refreshing reading given how the policy conversation tends to be so risk averse in our country as to devolve into platitudes. And then come the material observations. The authors start by observing that the award led to an increase in transfers to the provinces of around two percentage points of GDP — from an average of 3.2 per cent of GDP over FY02-09 to 5.1pc over FY10-24. This is huge. So the next question to ask is what did the provinces do with all this money? And here comes the rub.

A new report shows how our fiscal-federalism problems are not, at root, technical failures to be fixed with better systems.

The bulk of the increased resources were consumed by an increased wage and pension bill, and rising administrative overheads. Roughly 82pc of the incremental resources transferred over FY09-23 were absorbed by current expenditure. The recurrent share of consolidated provincial spending rose from about 60pc in FY09 to over 80pc by FY24. In real terms, salaries rose around 250pc and pensions around 330pc over FY09-23, while development spending grew only around 60pc and remains around 20pc of the total. Some of this was due to the expansion of the workforce in education and health due to which the expansion in the wage bill of these sectors lead the others, implying some material investment in schools and healthcare facilities.

But where are the results from these investments? Take education. The report notes that there is no relationship between increased spending and improved outcomes. Sindh and Balochistan increased their real, per capita education spending the most since FY09 (350pc and 650pc respectively) yet both provinces saw declines in net enrolment and adult literacy, critical indicators in the education sector. KP was an outlier where its real, per capita spending on education did not increase in these years, but its net enrolment rate went up 2pc and adult literacy rose by nine points.

These are headline numbers only. The authors deploy a series of sophisticated techniques to measure the impact of this incremental spending, as well as what drove allocation decisions for each provincial government. Different techniques yield slight differences in the results, but some findings keep popping up. KP comes out as a star performer, achieving the most with the least resource inputs during this time period. Sindh and Balochistan lag across the board. Higher spending yields consistently worse outcomes, from education to poverty alleviation. Allocations are not targeted; they are not driven by need. The single most important variable governing allocations is the previous year’s spending, not deprivation.

The report finds that provincial governments have been more interested in preserving discretionary authority in spending decisions than they are in bringing about improved socioeconomic outcomes or in targeting delivery from available spending. In a somewhat bold section (given how squeamish the World Bank tends to be when touching on political matters) they go to some lengths to show that Pakistan’s fiscal-federalism problems are not, at root, technical failures to be fixed with better systems — they are the predictable product of an incentive structure in which controlling money is a source of political power, so the people who hold that power have little reason to give it up. A number of “governance failures” are then seen as features of a system that seems to be designed to build and maintain ruling coalitions, not necessarily in the sense of coalitions between political parties, but coalitions of networks embedded within the provincial government apparatus and society at large. This is something shared across the provinces.

The findings of the report must now be responded to by the provincial authorities. Each one should now present its response, especially to the findings in the report about their specific province. Silence in the face of these disclosures must be read as agreement with the findings.

Here are my own thoughts. The report tells us nothing about whether these results would have been materially better if the federal government were in charge of performing these functions instead. So there is no case here for reversing the NFC Award. There is a case, however, for further downward devolution, and strengthening accountability in the provincial governments. Accountability means electoral accountability, and not supra statal bodies overseeing other state bodies. The results also don’t break the period down into smaller segments so that we could see whether there was a period during which provincial governments had begun to deliver but then later went off track.

The provincial governments have become the seats of embattled, civilian power in this country. Much of the political economy the report picks up is a function of this. To get them to return their focus to the electorate, there is a need to make them accountable to their voters all over again. That is the way forward.

The writer is a business and economy journalist.

khurram.husain@gmail.com

X: @khurramhusain

Published in Dawn, July 2nd, 2026 ...