Introduction / Executive Summary

1. The debate over creating new provinces in Pakistan has gained renewed attention, with proponents arguing that smaller administrative units could improve representation, governance and access to public services.
2. However, much less attention has been paid to the fiscal implications of provincial restructuring. This report examines two questions: how would the existing provincial share of the divisible pool be distributed among the proposed units under the 7th NFC Award and how much additional recurring expenditure would new provinces require?
3. The analysis considers two restructuring scenarios. Scenario A divides Punjab into Bahawalpur, South Punjab and the remaining Punjab, increasing the number of provinces from four to six.
4. Scenario B treats each existing administrative division within Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan as a province, resulting in 30 provinces.
5. The NFC exercise uses a nested allocation approach in which each existing province retains its current 7th NFC share, which is then distributed among its successor units according to the existing NFC criteria: population, poverty and backwardness, revenue collection or generation, and inverse population density.
6. Under Scenario A, South Punjab receives an illustrative allocation of Rs 1,001.06 billion, while Bahawalpur receives Rs 537.01 billion.
7. Under Scenario B, allocations differ considerably, ranging from Rs 720.94 billion for Lahore and Rs 690.84 billion for Karachi to Rs 45.62 billion for Loralai and Rs 49.83 billion for Zhob. 11 of the 30 proposed units receive less than Rs 150 billion.
8. The estimated annual recurring cost of a new provincial government is Rs 22.4 billion under the low-cost scenario and Rs 25.9 billion under the high-cost scenario.
9. Under Scenario A, the net additional recurring cost is estimated at Rs 46.9–56.2 billion annually, equivalent to around 0.55–0.66% of the formula-based provincial pool.
10. Under Scenario B, the corresponding cost rises sharply to approximately Rs 609.2–730.3 billion, or 7.18–8.61% of the formula-based pool.
11. The most important finding emerges when these fixed institutional costs are compared with the NFC resources available to individual proposed provinces. Large units such as Lahore and Karachi would spend only around 3–4% of their illustrative NFC allocations on the core provincial structure, while the burden rises sharply for smaller units.
12. Using a 10% fiscal sustainability benchmark based on the low recurring-cost estimate, 16 of the 30 proposed provinces under Scenario B remain at or below the threshold, while 14 exceed it.
13. The burden is particularly high in the smallest units: the core provincial structure would absorb around 49% of Loralai’s allocation, 45% of Zhob’s and 37% of Rakhshan’s even under the low-cost estimate.
14. Every proposed province with a population below 1.2 million would require more than one-third of its illustrative NFC allocation to finance the core provincial government structure.
15. The findings therefore show that the fiscal implications of restructuring depend strongly on the number and size of the provinces created. Limited restructuring involving relatively large units produces a much smaller recurring burden, whereas several smaller division-based provinces would face disproportionately high administrative costs relative to their expected NFC resources.
16. Any proposal for new provinces should therefore be accompanied by a formal fiscal costing exercise, consideration of the resource base of the proposed units, and application of a fiscal screening benchmark to assess whether recurring provincial-government costs remain proportionate to available resources. Where the primary objective is improved access to government and public services, stronger local governments should also be considered as an alternative to replicating the full structure of provincial government.
17. At the fiscal level, creation of new provinces will put additional pressure on fiscal resources of smaller provinces, especially those with lower NFC allocations and constrained revenue generation capacity. A greater portion of their available resources would be consumed by ongoing government expenses, resulting in reduced fiscal room for other provincial spending, such as public service provision and developmental expenditure.