According to a recent World Bank study titled "Making Federalism Work - the Eighteenth Constitutional Amendment," the new arrangement has failed to institutionalise constraints on barriers to mobility of goods and factors of production across the nation and instead opened up potential for such barriers by recognising the provincial authority to discriminate against non-residents. By delegating most regulatory functions to the provincial domain, the Amendment has created potential for a "jungle of confusion", exacting high transaction costs from citizens and businesses. The Amendment also poses considerable challenges to multi-order governance in the country and, in particular, has circumscribed the role of federation in the "war on terror" as law and order are now essentially the functions of the provinces. The potential risks on the economic and service delivery fronts are even greater, with the provinces following "beggar-thy-neighbour" policies. Provincial ownership of financial institutions creates soft budget constraints while provincial powers to tax agriculture income, capital gains and services present a significant roadblock to tax reforms. The structure of federal organisation was not aligned with the new mandate and the federal government continues to retain redundant institutions and employees. This state of affair poses significant challenges to fiscal discipline and macro stability.
The World Bank study has concluded that there is an enormous unfinished agenda for reforms that needs to be undertaken over the coming years. A beginning must now be made by recognising the need for reforms and developing a strategy to develop national consensus on the direction of reforms. The Federal government should develop a framework for tax base harmonisation and income/sales attribution and allocation rules. It should also establish an autonomous tax collection agency, supervised by a board of governors comprising all orders of government and the private sector. Besides, the federal government should carry out an overarching reform process to realign structures with new responsibilities and work out a separation programme for closing or restructuring of redundant institutions, such as the Planning Commission, HEC and National Centre for Human Development. On their part, the provincial governments should conduct a strategic review of their finances and operations in order to meet challenges in service delivery associated with the new empowerment. In particular, they need to introduce civil service reforms, rethink the role of local government as the primary agent for service delivery and consider contracting out certain taxes within their domain by introducing legislation to make that role possible.
The contents and, in particular, the conclusions of the World Bank study on the 18th Amendment, in our view, are highly significant and need to be analysed thoroughly with a view to dealing appropriately with the challenges thrown up by such an important piece of legislation in the history of the country. It would be even better if the federal and provincial governments jointly constitute a group of experts to examine the World Bank's findings carefully and finalise their own set of proposals to set the reform agenda and then set the ball rolling. We say this because the local experts are likely to be more aware of the ground realities and better attuned to offer practical solutions to the critical issues arising from the 18th Amendment. On the face of it, however, what the World Bank has said makes ample sense. The Amendment indeed represented a golden opportunity for reforming multi-order governance but the parliament seems to have failed to address some difficult issues involved, including realigning roles and responsibilities of the federal, provincial and local governments in the interest of peace, order and growth. As the country has got only a handful of unbalanced federal units, the potential for conflicts between the federation and provinces seems to have widened the CCI and greatly empowered provinces may not be in a position to deal effectively with some "hot button" issues, especially when political parties in power in the provinces and at the centre are not the same. Also, there is now a greater risk of fiscal mismanagement than before. In the absence of a legal framework for fiscal responsibility, provinces are not only spending excessively on sub-optimal projects and squandering huge amounts of money available, courtesy the latest NFC award but are also unwilling to raise resources through their own efforts by taxing sectors and activities within their domain.
While provinces have almost complete authority on their resources, they are least bothered to develop or utilise them to promote growth for the welfare of their residents. Addressing the annual lunch of the Overseas Investors Chamber of Commerce and Industry on 6th December, 2012, the President of Pakistan had to stress upon the provinces to play a proactive role in promoting investment and trade in the wake of 18th Amendment, saying that it had empowered them to play a greater dynamic role in attracting local and foreign investment.
The think tanks in other countries must have reminded the provinces of their new responsibilities through various studies and seminars and taken them to task for their failure to do the needful but, unfortunately, in Pakistan, there is hardly any such mechanism and this kind of debate generally degenerates into political squabbling and point-scoring. It may be that these are teething troubles of a completely new arrangement borne out of the 18th Amendment but every conscious Pakistani needs to be made fully aware of the pitfalls of the new arrangement and the responsibilities which now must be assumed by the provinces. This is absolutely necessary because there is no possibility of reversal of this arrangement at any stage and Pakistan has to live with the consequences of the new order in the foreseeable future.