World Bank Policy Paper Series on Pakistan pk 03/12 November 2012 Making Federalism Work – The 18



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World Bank Policy Paper Series on Pakistan

PK 03/12

November 2012

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Making Federalism Work – The 18th Constitutional Amendment
Anwar Shah

_______________________________________________


This publication is a product of the South Asia Poverty Reduction and Economic Management Unit. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions in Pakistan and around the world. Policy Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at shah.anwar@gmail.com

Abstract
The almost unanimous passage of a landmark consensus constitutional amendment—the 18th Constitutional Amendment—restored Pakistan’s constitution to its original intent of a decentralized federation of four provinces as envisaged in the 1956 and 1973 constitutions. This amendment was hailed by policy makers and academics alike as a major step forward in reforming the multi-order governance in Pakistan. This paper takes a closer look at the provisions of this amendment and highlights both the potentials and pitfalls of the new constitutional order for good governance in Pakistan. The paper concludes that the amendment must be seen as a first yet small and incomplete step in reforming multi-order governance in Pakistan. A large unfinished reform agenda remains to be charted.

The Policy Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development / World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.



Making Federalism Work for the People of Pakistan: Reflections on the Role of the 18th Constitutional Amendment
Anwar Shah

This paper presents the findings of the World Bank mission comprising Hanid Mukhtar and Anwar Shah that visited provincial capitals in June 2010. The paper was prepared by Anwar Shah drawing upon valuable inputs by Hanid Mukhtar. It further benefited from comments and guidance by Jose Lopez Calix. The author is grateful to Alvaro Manoel, Abdu Muwonge and Kai Kaiser for helpful comments. The World Bank is grateful to Federal and Provincial Policy makers and government officials, Dr. Hafiz Pasha and Dr. Aisha Ghaus Pasha for their assistance to the mission.




Executive Summary
The Significance of 18th Amendment for Multi-order Governance in Pakistan


  1. The 18th Amendment has introduced profound changes in multi-order governance. These include strengthening institutions of intergovernmental coordination and conflict resolution through the revival of the Council of Common Interest (CCI) and making the National Economic Council (NEC) more responsive to the provincial interests. It also eliminated federal/provincial shared functions and reassigned selective functions to the federation (not the federal government) to be guided by the Council of Common Interests and devolved others to the provinces. It has stripped the federal government of responsibilities for planning, industry, agriculture and rural development, social services and welfare including social protection. It has reasserted provincial control of local government functions and institutions. This has resulted in abolition of 17 ministries including the ministries of food and agriculture, education and health. It has also expanded the taxing powers of the provinces including a dynamic and buoyant tax base–sales tax on services. The Amendment also opened door for greater access to capital finance by permitting both internal and external borrowing by the provinces subject to limitations imposed by the National Economic Council.




  1. The Amendment provided for a short transition period for transfer of responsibilities to provinces to be completed by June 2011. This has already been accomplished but full transition to the new constitutional order is expected to be completed by Fiscal Year 2015. This includes having new institutions of federation fully operational, restructuring of federal and provincial governments consistent with new constitutional order, and federal guarantees for transition expiring for redundant institutions e.g. the Planning Commission, Higher Education Commission and National Centre for Human Development etc., and employees Once the system matures in Fiscal Year 2015, the structure of government in Pakistan would have undergone a profound transformation from centralized federal power to the centralization at the provincial level. For all economic and social services, provinces will assume a dominant role in policy making and service delivery. For an average citizen–Allah Rakha–then the government that would matter is his provincial government. Will it be a change for better or worse? Much depends upon how provincial governments react to the newly assumed powers.


The 18th Amendment—for better?


  1. At least in theory the amendment may represent welcome move towards good governance in several respects. First it could reduce the threat of military dictatorship and thereby hopes to usher in a democratic and stable political order. Such a transformation in Brazil banished the military from the political scene (see Shah 1990), but in Pakistan it may well turn out to be a false hope if past political history of Pakistan is any guide. Second, by limiting arbitrary federal action, it has attempted to limit provincial discontent with federal policies. This has the potential of building trust and harmony in federal-provincial relations and thwart succession movements garnered by federal unilateralism or high handedness and brutality of military regimes. Third, the Amendment, by eliminating overlapping responsibilities has brought greater clarity for citizens in terms of which order of government to hold accountable for dysfunctional service delivery as their buck now clearly stops at the provincial chief minister’s doorsteps. Finally and most importantly, the Amendment has also moved government decision making a few small steps closer to the people. It has the potential of making governments responsive and accountable to people and tailoring public services to their aspirations and needs.


The 18th Amendment—A Missed Opportunity to Address Unfinished Agenda in Federalism Reforms?


  1. For reforming multi-order governance in Pakistan, the 18th Amendment represented a golden opportunity that was missed in addressing some difficult issues in governance reform in Pakistan. These included realigning roles and responsibilities of federal, provincial and local governments in interest of peace, order, good government and growth. The Amendment further stripped federal government of its core federal functions such as securing an internal common market, security of life and property, protection of minorities and disadvantaged groups dealing with natural disasters. Provincial ownership of natural resources also works against a common political and economic union. Provincial powers to tax agricultural income, capital gains and services present a significant roadblock to tax reform. Finance does not follow function and provinces have the luxury of spending taxpayer monies without any accountability. Federal organization structure is not in alignment with the new mandate and the federal government continues to retain redundant institutions and employees. The revenue sharing arrangements also strips the federal government access to relevant financing instruments to secure a common economic union and incentivize citizen- and results-based accountability for merit services. Provincial government ownership of financial institutions poses significant risks for fiscal discipline and macro stability.




  1. By relegating most regulatory functions to provincial domain, the Amendment, has also created a potential for a jungle of confusing and contradictory regulatory standards with high transactions costs for business and citizens. Finally and most importantly, the 18th Amendment failed to institutionalize any constraints to barriers to factor and goods mobility across the nation and instead has opened up potential for such barriers by recognizing provincial authority to discriminate against non-residents. The unintended adverse consequences of this change may well constrain proper working of political and economic union in Pakistan.


Potential Risks of Post 18th Amendment Constitutional Order: Province Building At Odds with Nation Building


  1. The 18th Amendment also poses significant challenges for multi-order governance in Pakistan. Foremost challenge arises in peace and order. As Pakistan has only a handful of unbalanced federating units, potential for federal-provincial and inter-provincial conflicts are significant and accentuated with empowered provinces and the CCI may not be in a position to deal with such hot button issues. The Amendment has also circumscribed federal role in the war on terror as law and order, including police protection, is now primarily provincial function. The Amendment has supported a model of multi-order governance that does not appear to be in tune with the development and security needs of Pakistan today. In the absence of fundamental reforms of political parties’ governance, electoral finance, land reforms and devolution to local governments, empowered provinces may not lead to greater participation and accountability, and the incidence of corruption and abuse of power may continue unabated. Empowered provinces may accentuate already common practice of the use of public sector hiring for political patronage. Pakistan has also a civil service culture of elitism and the 18th Amendment may make pursuit of such stalled reforms even more difficult. On the economic and service delivery front, potential risks are even greater with provinces following “beggar-thy-neighbor” policies and creating barriers to trade and factor mobility. Manna from heaven transfers through the National Finance Commission (NFC) awards leaving no incentives for provinces to set national minimum standards for merit services and to create a level playing field for poorer provinces to integrate with the national economy. The provincial ownership of financial institutions creates soft budget constraints and in the absence of a legal framework for fiscal responsibility pose significant risks for macro-stability.


The Way Forward


  1. In order to forestall risks enumerated above, the 18th Amendment must be seen as an important first step in a series of reforms to create a responsive, responsible, fair and accountable multi-order governance in Pakistan. These reforms agenda could include:




  1. Intermediate run at the federation level:

  • To develop a coordinated response to ensure liberty and safety of life and property and ensuring the success of the war on terror.

  • To institute a framework for ensuring that there are no barriers to trade and factor mobility.

  • To develop a framework for transparency of all government operations and establishing compliance with the citizens right to information.

  • To institute a legal framework for fiscal responsibility binding on all orders of government. This framework should introduce hard controls with objective escape clauses on borrowing, deficits and debt, and expenditures on wages and benefits as a share of public expenditure and prohibit government ownership of financial sector institutions for all orders of government as was done in Brazil in 2000.




  1. Long run at the federation level:

  • To develop a framework for tax base harmonization and income/sales attribution and allocation rules.

  • To establish an autonomous tax collection agency for collection of taxes for a fee at all levels and supervised by a board of governors comprising all orders of government and the private sector.

  • To harmonize federal and provincial regulatory regimes




  1. Intermediate run at the Federal Government level:

  • To conduct an overarching reform to realign structures with new responsibilities and work out a separation program for redundant employees and closing or restructuring of redundant institutions such as the Planning Commission, Higher Education Commission (HEC) and the National Center for Human Development (NCHD).

  • To carry out fast track privatization and closing the Ministry of Privatization.




  1. Long run at the Federal Government level:

  • To consider contracting out tax collection to autonomous tax collection agency at the federation level.

  • To conduct a review of federal transfers with a view to setting national minimum standards for merit goods across the nation by introducing output-based finance in order to ensure monitoring of results and performance accountability.




  1. Intermediate run at the Provincial Government level:

  • To conduct a strategic overarching review of provincial government finances and operations to ensure that the provinces can meet challenges in service delivery associated with the new empowerment.

  • To introduce civil service reforms to reward task specialization and accountability for results.

  • To establish service standards, introduce incentives for competitive provisions and citizen-based accountability mechanisms.




  1. Long run at the Provincial Government level:

  • To rethink the role of local government as the primary agent for service delivery, local economic development and improving economic and social outcomes and introducing legislation to make that role possible.

  • To consider contracting out capital value taxation, agricultural income tax and services tax to the autonomous tax collection agency at the federation level.




  1. Of course, this is an ambitious reform agenda and will take some time to materialize. Some would also argue that Pakistan may not have the capacity at subnational levels to successfully implement such reforms. While there may be some merit in this argument, technical capacity constraints, if binding are relevant for all orders of government as Pakistan has a civil service with rotating appointments and there may not be much significant difference in technical capacity in Islamabad versus Lahore or Karachi. Experience elsewhere especially in China and Colombia has shown that technical capacity assumes a seconadary importance in local government performance. What matters most are the political commitment, bureacratic incentives and results-based accountability. In Pakistan, political commitment to introduce fundamental reforms to improve service delivery has been consistently lacking and bureacratic incentives remain misaligned to command and control rather than serving citizens. Therefore, an important first step is for all orders of government to subscribe to the objectives of such a reform agenda and developing strategies to accomplish these objectives through formal and informal means.




  1. Pakistan during its more than sixty years of existence has moved from one crisis to another. An important reason for dysfunctional governance in Pakistan is lack of adherence to constitutional principles and disrespect for the rule of law by the ruling elite. The 18th Amendment is well intentioned to bring a greater clarity in the roles and responsibilities of various orders of government and to ensure greater provincial autonomy to possibly reduce incentives for military interventions in the political system. This Amendment, must however be seen as only the first and an incomplete step toward reforming public governance in Pakistan. To complete this process further, fundamental reforms are needed to ensure that the public sector serves public interest and secures a common political and economic union. Important first steps in this direction would include devolution to local governments and a framework for fiscal responsibility and fiscal discipline for all orders of government. There is an enormous unfinished agenda for reform that needs to be undertaken over the coming years. A beginning must be made now by recognizing the need for reforms and developing a strategy to develop national consensus on the directions for reform. In the words of a Chinese philosopher, all long journeys start with small steps. The 18th Amendment must be seen as that first step in the long journey to restore Pakistan to its original glory. Indeed the reform process is eternal. We never fully succeed but we must keep trying.


Introduction


  1. On April 20, 2010, Pakistan’s parliament passed a landmark consensus constitutional amendment to restore Pakistan’s constitution to its original intent of a decentralized federation of provinces as envisaged in the 1956 and 1973 Constitutions. This development came after several decades of military and autocratic rule which dismembered Pakistan’s Constitution to serve the interests of the ruling elite and in the process centralized fiscal powers at the federal level. Table 1 shows that the division of powers in Pakistan has been in flux since late 1950s. The pendulum has swung in favor of centralization of powers at the federal level since 1956. This trend was reversed recently by the 18th Amendment in 2010. Taxing powers were centralized in 1956 at the federal level in the interest of tax harmonization and lower tax collection costs. That year, the provinces voluntarily gave up the powers to collect sales taxes in favor of federal collection and a formula based revenue sharing arrangements. The arrangements were formalized by the 1956 constitution. The military regime of General Ayub Khan sought legitimacy by introducing a system of “basic democracy” with indirect elections at the local levels and enhancing the powers of local council while keeping these under strict controls of federal bureaucrats. The regime also amalgamated the four provinces of the “West Pakistan” into one unit to counterbalance the dominance of “East Pakistan” in the federal system. The system of basic democracies was dismantled with the fall of the regime in 1968. During the period 1968-1971 there was a movement towards greater autonomy of the provinces. The 1971 elections returned Sheikh Mujibur Rahman of Pakistan Awami League to power at the federal level but the leader of the Pakistan Peoples Party, Zulfikar Ali Bhutto in collusion with Pakistan Army prevented Mujibur Rahman from assuming the position of the Prime Minister and instead ordered military action in East Pakistan which led to the formation of East Pakistan as an independent state in 1972. This was followed by dismantling of one unit in the truncated Pakistan. From 1973 to 1977 Pakistan was under a pseudo military-cum-democratic regime.




  1. A new constitution was enacted in 1973 but fundamental rights were suspended in the eve of promulgation of the new constitution. The emergency powers were used by Bhutto regime to wrest control of major industries, businesses and schools from the private sector. In 1977, Pakistan military used the pretext of economic decline and war in Afghanistan to stage a coup d'état. General Zia ul Haq ruled Pakistan with an iron fist from 1977 to 1987 and centralized powers at the federal level. Local governments were allowed to function under strict control of federal bureaucrats. As these bureaucrats assumed greater powers they made sure that most local governments remained dysfunctional and therefore under direct supervision of federal civil servants. With the demise of General Zia, Pakistan returned briefly to democratic control but the system was destabilized by the military. Again in October 1999 General Pervez Musharraf staged a military coup under the pretext that popularly elected prime minister did not follow the due process in removing the Chief of Army staff. In 2001, he sought to strengthen local governments while keeping control through indirectly elected Nazims as an antidote to return to power of the two major national political parties. General Musharraf was forced to resign in May 2008 and with his departure the local government system was set aside by the provinces. Table 1 shows that there has been consistent erosion of provincial taxing and spending powers over the period 1955-2010 and this trend was arrested by the 18th Amendment. However local government spending powers have typically increased during military regimes and diminished under democratic regimes while their taxing powers were eroded in late 1990s with the abolishment of octroi tax in return for a static federal revenue guarantee—a poor bargain that significantly weakened local self-governance in Pakistan. Contrasting attitudes of military and democratic regimes towards local governments is explained by the military governments supporting a semblance of local autonomy to seek legitimacy and undercut political parties whereas democratic regimes at the center and provinces perceive local government as competitive providers reducing their relevance in people’s lives. Both types of regimes however perceive empowered and autonomous local governments undercutting their own dominance and control of political system and as a result local governments have remained as wards of the state in Pakistan.
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