Pakistan's Fiscal Federalism: Local Service Delivery's Broken Promise

Introduction

Pakistan's journey towards effective governance has been punctuated by ambitious reforms, none more significant than the 18th Constitutional Amendment of 2010. This landmark legislation aimed to fundamentally alter the country's power dynamics by devolving substantial powers and responsibilities to the provinces, with the implicit promise of bringing governance closer to the citizenry and improving the delivery of essential public services. By 2026, however, the promise of enhanced local service delivery through fiscal federalism remains a complex and often frustrating reality. While provinces have indeed gained greater autonomy, the critical question is whether this autonomy has translated into tangible improvements in the lives of ordinary Pakistanis. The evidence suggests a persistent and widening gap between devolved mandates and the fiscal wherewithal to meet them, creating a decentralization dilemma that threatens to undermine the very objectives of good governance and equitable development. This analysis delves into the intricate interplay of fiscal federalism, institutional capacity, and service delivery outcomes in Pakistan, exploring the structural impediments and charting a course towards a more effective realization of devolved governance.

The Evolving Landscape of Fiscal Federalism in Pakistan

Pakistan's federal structure has historically been characterized by a strong central government. The 18th Amendment sought to rebalance this, transferring 17 ministries and divisions from the federal to the provincial domain, including crucial sectors like education, health, and higher education. This devolution was intended to foster greater accountability and responsiveness to local needs. Financially, the amendment aimed to address the vertical fiscal imbalance through the National Finance Commission (NFC) Award, which determines the distribution of federal revenues between the federation and the provinces. However, the implementation and subsequent evolution of these arrangements have been fraught with challenges. Post-2010, provinces have indeed seen an increase in their share of the divisible pool of taxes. The 7th NFC Award (2009) allocated 57.5% of the divisible pool to the provinces, a figure that was maintained in the 9th NFC Award (2016) and is currently under negotiation for the 10th Award, with provinces advocating for a higher share. While this has provided provinces with more financial resources, it has not always been sufficient to cover the expanded responsibilities, particularly in sectors with high demand and significant under-investment. The federal government retains control over major revenue-generating taxes, such as income tax, corporate tax, and sales tax on services (excluding services levied by provinces). This structure inherently creates a dependency of the provinces on federal transfers, making them vulnerable to the fiscal health and political priorities of the central government. Furthermore, the predictability and timeliness of these transfers have been a persistent issue. Delays in the release of provincial shares from the federal divisible pool can severely disrupt provincial budgets, forcing them to cut development expenditure or delay essential service provision. The IMF's Staff Report on Pakistan (2025) highlighted that "unpredictable fiscal transfers from the federal government to provinces create significant budgetary rigidities and hinder effective medium-term fiscal planning at the sub-national level." This structural dependency, coupled with the fact that provinces often face unfunded mandates, creates a perpetual fiscal squeeze. The Challenge of Unfunded Mandates One of the most significant structural impediments to effective service delivery post-devolution is the persistent issue of unfunded mandates. While the 18th Amendment clearly assigned sectors like health and education to the provinces, the financial resources allocated through the NFC Award have often fallen short of the actual expenditure required to maintain and improve these services to national standards. For instance, the per capita expenditure on health and education in many provinces remains significantly lower than international benchmarks or even the requirements for achieving Sustainable Development Goals (SDGs). According to data from the Pakistan Bureau of Statistics (2025), provincial expenditure on education as a percentage of GDP has hovered around 1.8-2.0%, falling short of the global recommendation of 4-6%. Similarly, health expenditure remains critically low, often below 1% of GDP. This fiscal gap forces provinces to make difficult choices, often leading to under-investment in critical areas such as primary healthcare, teacher training, and school infrastructure. Inter-Provincial Fiscal Disparities The uneven distribution of resources and capacity across provinces exacerbates service delivery inequalities. Provinces with a larger tax base and greater capacity for revenue generation, such as Punjab, can supplement federal transfers with their own revenues to a greater extent than less developed provinces like Balochistan or Khyber Pakhtunkhwa. This leads to a widening disparity in the quality and accessibility of services. For example, access to specialized healthcare facilities, quality educational institutions, and basic infrastructure like clean water and sanitation varies dramatically between provinces. The World Bank's Pakistan Development Update (2026) noted that "inter-provincial disparities in human development indicators are increasingly correlated with fiscal capacity, creating a cycle of disadvantage for poorer regions."

The Capacity Conundrum: Local Governance and Service Delivery

Even where fiscal resources are available, the capacity of sub-provincial and local governments to effectively plan, implement, and monitor service delivery remains a critical bottleneck. The 18th Amendment devolved many functions to the provinces, but the subsequent devolution to local governments has been inconsistent and often weak. In many provinces, local governments lack the administrative autonomy, technical expertise, and financial independence to function effectively. This is compounded by a lack of robust data collection and analysis mechanisms, which are essential for evidence-based policymaking and targeted service delivery. Weak Institutional Frameworks at the Local Level The effectiveness of local government institutions varies significantly across provinces. While some provinces have made efforts to strengthen their local governance structures, others have struggled to implement meaningful devolution. This often results in a situation where local representatives are responsible for service delivery but lack the authority or resources to make decisions. For instance, the appointment of administrators in local governments, a practice seen in some provinces, bypasses elected representatives and undermines the principle of local accountability. The absence of empowered local bodies means that decisions regarding primary healthcare, basic education, and local infrastructure are often made at provincial or even federal levels, negating the intended benefits of decentralization. The Data Deficit in Service Delivery A critical impediment to effective service delivery is the pervasive data deficit. Provinces and local governments often lack reliable, up-to-date data on key service delivery indicators. This makes it difficult to identify areas of greatest need, monitor progress, and evaluate the impact of interventions. For example, accurate data on student enrollment, learning outcomes, disease prevalence, and infrastructure maintenance needs is often fragmented or unavailable. Without this data, planning becomes ad-hoc, resource allocation is inefficient, and accountability mechanisms are weakened. The World Bank's Pakistan Development Update (2026) emphasized that "investments in robust data systems and analytical capacity at the sub-national level are crucial for improving the efficiency and equity of public service delivery." Training and Human Capital Gaps The human capital within provincial and local government administrations often suffers from a lack of specialized training in areas critical for modern public service delivery, such as public financial management, project management, data analytics, and citizen engagement. While civil servants are dedicated, the existing training regimes may not adequately equip them with the skills needed to navigate the complexities of devolved governance and service provision in the 21st century. This capacity gap can lead to inefficiencies, delays, and suboptimal outcomes in service delivery. Comparative studies from countries like Malaysia and South Korea, which have successfully implemented decentralized service delivery models, highlight the importance of continuous professional development and capacity building for public sector officials at all levels (ADB, 2023).

Impact on Key Service Sectors

The consequences of these fiscal and capacity challenges are most acutely felt in the delivery of essential public services. Health, education, and infrastructure development, all devolved sectors, are grappling with persistent underfunding and operational inefficiencies. Health Sector Strain Despite being a devolved subject, the health sector continues to face immense pressure. Provinces are responsible for primary and secondary healthcare, but often lack the resources for essential medicines, equipment upgrades, and adequate staffing, particularly in rural and remote areas. The reliance on federal transfers means that provincial health budgets are vulnerable to central government fiscal constraints. This has led to a situation where the quality of public healthcare services is often suboptimal, forcing citizens to seek expensive private alternatives or endure inadequate care. The World Health Organization (WHO) Country Cooperation Strategy for Pakistan (2023-2027) highlights that "under-resourcing of the public health system, coupled with inter-provincial disparities, contributes to significant inequities in health outcomes." Educational Deficits Similarly, the education sector, a cornerstone of human development, suffers from chronic under-investment. Provinces are responsible for curriculum development, teacher training, and school infrastructure. However, many provinces struggle to meet basic standards due to insufficient funding. This manifests in overcrowded classrooms, a shortage of qualified teachers, outdated learning materials, and inadequate school facilities, particularly in marginalized communities. The gap between the promise of universal quality education and the reality on the ground is a direct consequence of the fiscal limitations faced by provincial education ministries. The Pakistan Education Statistics (2025) report by the Ministry of Education and Training indicates that while enrollment rates have seen marginal improvements, learning outcomes remain a significant concern, with a substantial percentage of students not achieving foundational literacy and numeracy skills. Infrastructure Gaps While large-scale infrastructure projects often remain under federal purview, provinces are responsible for a significant portion of local infrastructure development, including roads, water supply, and sanitation. The fiscal constraints faced by provinces directly impact their ability to undertake and maintain these vital public goods. This leads to deteriorating road networks, inadequate access to clean water and sanitation, and a general lack of investment in local public infrastructure, which in turn affects economic productivity and quality of life. The Asian Development Bank (ADB) report on Pakistan's Infrastructure Development (2024) points out that "the devolution of infrastructure responsibilities without commensurate fiscal capacity has led to a backlog of essential projects and a decline in the quality of existing infrastructure in many regions."

Strengths, Risks & Opportunities — Strategic Assessment

Pakistan's fiscal federalism model presents a complex interplay of inherent strengths, significant risks, and crucial opportunities for enhancing local service delivery.

What Happens Next — Three Scenarios

Conclusion & Way Forward

The promise of the 18th Amendment – to foster responsive and effective governance through fiscal federalism – remains largely unfulfilled in 2026. The structural disconnect between devolved responsibilities and the fiscal capacity to meet them, coupled with persistent institutional weaknesses at sub-national levels, continues to impede the delivery of essential public services. This creates a cycle of under-investment, inequality, and citizen dissatisfaction. Addressing this decentralization dilemma requires a multi-pronged approach that goes beyond mere administrative adjustments. It necessitates a fundamental recalibration of Pakistan's fiscal federalism architecture, a sustained commitment to building capacity at the local level, and a data-driven approach to policy formulation and service monitoring. The ongoing negotiations for the 10th NFC Award present a critical juncture. Provinces must advocate for a revenue-sharing formula that genuinely reflects their expanded responsibilities and addresses the historical vertical fiscal imbalance. Simultaneously, the federal government, in collaboration with provincial governments, must prioritize investments in human capital development and institutional strengthening at the sub-provincial and local government levels. This includes enhancing data collection and analytical capabilities, providing specialized training for public officials, and ensuring genuine administrative and financial autonomy for local bodies. Without these concerted efforts, Pakistan risks perpetuating a system where devolution remains a theoretical construct, failing to translate into the tangible improvements in public services that its citizens deserve. The path to effective decentralized service delivery in Pakistan is arduous, but not insurmountable. It requires a sustained political will to empower sub-national governments, coupled with strategic investments in institutional capacity and a commitment to equitable resource distribution. Only then can the promise of the 18th Amendment be fully realized, bringing governance closer to the people and fostering genuine development.