Wednesday, October 5, 2011

Water treaty and peace

Approximately 80 per cent of Pakistan’s agricultural land depends on the Indus river system while the remaining is rain-fed. - File photo

On September 19, the Indus Water Treaty signed in 1960 at Karachi entered its 51st year, surviving hostility, conflicts, and wars between the two nuclear rival nations.

Some disputes not withstanding that historical fact alone sufficiently qualifies as a testimony of the IWT success as one of the most important water sharing arrangements of the modern world.
This article discusses the background of this accord and its implications for the ‘nuclear flash point’ of the world, where trade, peace, and security traverse a very complicated terrain.

The water management dispute over the river Indus, which originates from Jammu and Kashmir valley, dates from a few years before partition in the backdrop of the world’s largest irrigation system built by the British. For many years, the undivided Punjab and Sindh disagreed over water rights.
In fact, partition of India only helped to internationalise a previously inter-dominion dispute. Just days before independence, the two countries had reached an interim understanding over joint administration of the water.

This ‘Standstill Agreement’ was breached by India on April 1, 1948 when India discontinued the delivery of water to the Dipalpur Canal and the main branches of the Upper Bari Daab Canal on the pretext of expiration of the old agreement.

It should not be considered a coincidence that Pakistan and India engaged into their first war only a few months later that resulted in the creation of ‘Azad Kashmir’ though water was not a declared source of war as such. Pakistan had always viewed Kashmir as its ‘jugular vein’ and hence its desire to control the flow of water through this valley always led to an environment of mistrust across borders.
In 1951, on the invitation of the then Indian Prime Minister Jawaharlal Nehru, an American expert, David Lilienthal, visited India to offer its government an advice over the use of water courses. He also visited Pakistan during that visit and then published a famous paper that would foreshadow the creation of the Indus Water Treaty a decade later.

Lilienthal observed that both countries were on the brink of another war over Kashmir and suggested that the rivals should agree to manage jointly the Indus River and its main tributaries, some of which flowed through the contested region. Water, he claimed, was a hidden driver of South Asia’s most dangerous territorial dispute and might also be the key to resolving it.

Both the countries, aided by the World Bank, undertook about ten years of protracted negotiations to reach a consensus under which India were to control the flow the all the three Eastern rivers flowing out of the Indus – Ravi, Beas and Sutlaj – while Pakistan was given the control over the water of Indus itself, Jehlum and Chenab.

The World Bank provided technical and financial assistance to Pakistan to manage water by building dams later.

Water flowing out of the Himalayas is a lifeline for both, Pakistan and India. Approximately 80 per cent of Pakistan’s agricultural land depends on the Indus river system while the remaining is rain-fed. On the other hand, 30 per cent of India’s hydro-electricity is currently generated in Kashmir, which will increase to 60 per cent when India completes seven of its 11 projects located in the region. It is little surprise that India maintains 750,000 strong troops in the valley.

India has never repudiated the IWT despite having fought three wars with Pakistan, undergoing several military standoffs and serious diplomatic rows, and keeping generally hostile armies on both sides. Over the last half century, except the dispute over Baglihar dam, Pakistan never filed a complaint at any international forum, including the World Bank, which brokered the Treaty.
Thus we can conclude that the treaty’s success in water resource sharing has directly contributed to the prosperity of millions of households who depend directly on agriculture and helped to maintain sufficient level of food security in both countries.

This history of mutual trust between two otherwise very hostile nations is a silver lining. Peace, mutual respect, and cooperation can rise above ideological boundaries. If India and Pakistan can demonstrate maturity and responsibility over water management despite all other problems, they may well embrace more openness and tolerance towards each other opening the trade corridor, people-to-people interaction, and educational exchanges.

September reminds us of the Indo-Pakistan war started in, that was due to Kashmir. Let this memory be replaced with celebration of the successful Indus Water Treaty, also signed in September, which continues to symbolise peace, security and prosperity in one of the poorest regions of the world.

Sunday, August 21, 2011

London Riots – A bird’s Eye View

“Everyone watching these horrific actions will be struck by how they were organized via social media -Free flow of information can be used for good. But it can also be used for ill”. British Prime Minister David Cameron says that the British government is, seeking to prevent a repeat of riots and looting in London and other British cities this week, might bar suspected troublemakers from using social media and other digital communications tools.
This clip shows a women who was caught on camera trying on trainers she had apparently just looted from a sports shop has been arrested after The Daily Telegraph found her identity. . She clearly belongs to the class that I am mentioning above.
TV, newspapers and social media has extensively reported on London riots. Britons are criticizing the government, but is it really the British government  is responsible for these riots? I believe that a deeper analysis is needed to understand the reasons. It seems like the rioting in London wasn’t politically driven or for any cause, other than may be stealing or smashing, but the whole events depicts that there was something wrong,  Is that really, one man getting shot causes people around the entire city (and even other cities) to start acting like this. Fact is that riots were erupted in the economically deprived areas of London that spread in other parts including Birmingham.  And most of the perpetrates were young men. These youths were just interested in opportunistic looting and getting free stuff. They assaulted members of their own communities and broke into shops in their communities.
Recent statistics highlights that; there are almost a million unemployed people in Britain with young people in London face unemployment of 23%, Without a doubt, with the increase in unemployment it is rigorously effecting dysfunctional families so such circumstances has resulted in indulging youth in performing such economic crimes.
The rioters were not breaking down governmental offices or assaulting politicians, because this was n’t a political riot. It was an excuse to get a big mass of people to outnumber the police and steal lots of posh goods which otherwise they could not afford .
No doubt those arrested should get the punishment, but when they come of jail what is the guarantee that they will have more anger and not commit such an act if not collectively, individually. Also there are many others who escaped and thousands who continue to unemployed. Is n’t this the right time for British Parliamentarians to focus on micro enterprise and micro finance and provide entrepreneurship opportunities to the youth.

Monday, August 8, 2011

When will Pakistan say no to corruption?

In 2010, Transparency International (TI) ranked Pakistan as 34th most corrupt country in the world (143 amongst 178 countries surveyed). According to the TI report, the overall corruption trend in Pakistan is alarming. For example, in 2009, $2.3 billion were siphoned out, increasing to $2.63 billion in 2010. This latest report highlighted the government’s unwillingness to plug the holes in the management of various public agencies and state-owned enterprises to stop this pilferage. That led to a scuffle between TI and the ruling PPP (Pakistan Peoples Party) government, resulting in Transparency International Pakistan’s (TIP) inability to conduct a survey this year.

According to the 2010 National Corruption Perception Survey (NCPS), tendering has been among the most corrupt sectors which – as Syed Adil Gilani, Chairman TI Pakistan noted – “eats away at least 40 percent of Pakistan development budget.” One of the key causes of corruption is the appointment of corrupt people at the senior positions in government departments and in the public sector companies. Recently the Supreme Court has taken several suo moto notices (i.e. notices taken on the Court’s own initiative) exposing corruption in the public sector and a number of cases stemming from mismanagement and corruption involving questionable appointees are being heard at the Court. For example:
  • National Logistic Cell – improper investment of $0.05 billion of NLC’s money in Stock Exchange; NLC is the largest logistics and freight-handling company in Pakistan.
  • National Bank of Pakistan – financial mismanagement causing massive losses to the NBP (largest financial institution in the public sector) and national exchequer.
  • Evacuee Trust Property Board – This trust was created at the time of the Partition and still has property worth billion of rupees under its ownership, most of which is rented out. A recent scandal involved investment of $11.65 million of trust money in real estate business at a speculative profit rate of 34 percent, lacking the approval of Federal Government, State Bank and Securities & Exchange Commission, and violating rules for investment of public money; this action created a financial burden on the 45,000 poor tenants of the trust properties.
  • Oil & Gas Development Corporation Ltd – appointment of the managing director was cancelled by the Supreme Court based on his prior conviction in a corruption case; OGDC is Pakistan’s largest oil and gas producer.
  • National Insurance Corporation Ltd – illegal investment of $0.02 billion in real estate; NICL is a leading insurer of public properties.
Such a phenomenal increase in corruption in Pakistan has damaged the country’s reputation. The first step towards improving Pakistan’s credibility and reducing corruption at the highest level is to ensure that honest officers are appointed through proper merit procedures. That will start only by appointing credible persons to the federal and provincial public service commissions, which are agencies responsible for appointing civil servants, and empowering them to select and place qualified and credible staff at the state-owned organizations.

Keeping the economy out of political crossfire

The Pakistan Business Council’s (PBC) agenda for economic reforms calling for reducing public finance deficits and increasing education, health and income support expenditures and reforms in the energy sector, closely echo voice of the nation as also reflected in the demands made by various political parties. By listening to the PBC leadership, the President has given the clear signal that without taking private sector on board, no economic reforms can be successful.

In order to be successful, the dialogues of the government with the business community at various levels must, however, make a quantum leap from the way in which similar talks have been conducted in the past, when political quarrels prevented any substantive debate on economic issues. This time, the government, along with its coalition partners, should present its case as one unified body, with no room for rhetoric mongers in its delegation, but rather bringing to the table seasoned and credible policymakers with deep knowledge of economic issues. The message to the business community and to the people of Pakistan should be clear: it is time to keep politics out of economics.

Despite past shortcomings, a consensus is not completely implausible. A quick review of the agendas of the stakeholders reveals a great deal of overlap and sufficient room for finding common ground among all of the participants. For instance, the business community says its objection to the Reformed General Sales Tax (RGST) is directed at the way it will be implemented, giving a greater role to the inept Federal Board of Revenue (FBR) in processing and calculating tax refunds for businesses.

Moreover, the private sector has called for austerity measures and lambasted colossal government borrowing of nearly Rs 1.17 trillion which has led to literal crowding-out of private borrowing. From 2005-07 to 2008-10, government borrowing increased by 400 percent, while private domestic borrowing fell 83 percent from Rs 768 billion to Rs 132 billion. The business community has also criticized state-owned enterprises (SOEs) for swallowing a whopping Rs 350 billion from the treasury, and called for the recovery of, and accountability for written-off loans to SOEs.

The economic reform proposals contained in the ten-point agenda generated by the opposition Pakistan Muslim League-Nawaz (PML-N) are not too different.

PML-N has asked for the implementation of Supreme Court decisions, a return of defaulted or written-off loans taken out by businesses and politicians from the government or government-run banks, immediate restructuring of SOEs, and relief for price increases on common consumer goods in order curb inflation, and a 30 percent reduction in government expenditures.

Likewise the proposal of the Muttahida Quami Movement (MQM) to steer the country out of the current fiscal and economic crisis recommends imposition of an agricultural tax, withdrawal of support prices for wheat, reform of agricultural land holdings, revamping of SOEs, recovery of loans, and reform of the FBR.

Yet, there has been progress in the major political parties’ understanding of the urgent need for economic reforms. They are unanimous in their calls to restructure, dissolve or sell off SOEs, reduce the size of the government, and impose taxation across the board (while an across–the-board tax imposition is not the most pro-market policy, it is necessary when the country’s tax-to-GDP ratio is 9.5 percent). It is very clear that a political consensus has already evolved toward the core agenda of strengthening Pakistan’s market economy. PBC’s economic agenda also suggests that the business community has come of age, by advocating for concrete economic reforms rather than more concessions.

This emerging consensus calls for a series of high-level consultative dialogues between parliamentarians, government and the business community at all levels. Its need has become imminent as the present government prepares its forth budget. With each passing day, Pakistan’s economy is becoming increasingly unsustainable, and if it continues on the present trajectory, it will soon be on the brink of collapse.

This text originally appeared in Dawn, the largest newspaper in Pakistan. The author is CIPE’s Pakistan Country Director.

Pakistan Railways – the route ahead

A train passing Tawinda Saway Khan station near Rahim Yar Khan, Pakistan (Image:

In the past two years, Pakistan Railways has shut down as many as 120 trains. For an entity losing Rs3 million every hour, this is perhaps not such a bad strategy although the swarms of commuters who travel by train will decry otherwise.

Earlier estimates of revenue at Rs28 billion and expenditure of Rs50 billion have been revised, and the gap widened. The projected budgetary subsidy of Rs21.9 billion has jumped to almost Rs44 billion with the recent bailout of Rs11.1 billion for repairing and upgrading of locomotives and tracks.

The bailout package, as economists like to put it, is a day late and a dollar short. From 2005-2010, budgetary expenditure on railways was only Rs45.5 billion compared to Rs155 billion on the national highways, while the motorway cost us three times as much as it would have cost to restructure and upgrade the entire rail network.

Bad governance, as prevalent in many other state-owned enterprises, has also plagued the railways. Now with reshuffling of the cabinet, the incoming minister instead of initiating another study must take immediate measures for implementation of recommendations already made to the ministry of railways.

One option, as many experts have advocated, is to privatize it. In 1980’s Japan National Railways had many of the same problems as Pakistan Railways has today. The Japanese government split the country into six operational regions to be run by six separate private passenger-rail companies.

Companies operating in rural areas on less profitable routes were eligible for a yearly operating-deficit subsidy while all companies were responsible for both rail operations and infrastructure management. Since privatization, JNR is in profit with increased passengers, stable fares, and less accidents.

However, when discussing privatization, one must keep in mind that almost all economies with privatized railways play a central role in financing infrastructure investment and continue to subsidize operating deficits. In a developing economy, the railway’s goal is not just provide a transit system to transport commuters and cargo but it also carries a socio-economic responsibility.

It has to connect the country and reduce a sense of distance, provide a cheaper and safer alternative to cars, act as a tool for traffic management, contribute towards reducing carbon emissions and provide concessions to students, senior-citizens, and the handicapped. While private owners might share some of these goals as a means to a sustainable business, their ultimate goal is profit maximization.

The other option is to follow the Indian model of modernization rather than privatization, which turned Indian Railways from bankruptcy to billions in profit, in less than five years, while remaining under government control. Through remarkable management, downsizing, outsourcing, retrenchment, product innovation, an ingenious advertisement approach, and booking of online tickets, Indian Railways has become India’s second most profitable state-run enterprise.

From 2007-2010 it made a whopping Rs346 billion in profits without increasing passenger fares or freight charges. Employing over 1.6 million people, carrying over 20 million passengers, and two million tons of freight every day, IR is a major catalyst for India’s economic growth. In Pakistan, there is no dearth of knowledge, skills, or technical expertise. The only impediment seems to be the lack of political will of the men at the helm of affairs.

Yet another option is to partially privatize or engage in a number of public private partnerships. The whole operational cycle can be broken down into segments and then outsourced to private parties.

Ticket sales, station management, logistics parks, cargo aggregation warehouses, construction, maintenance, and operation by regions or lines can definitely be accomplished by involving private sector enterprise.

In another strategic scenario, the government could lease rights to bidders who can invest, construct, operate, and then eventually transfer the infrastructure to the government. In fact, earlier last year, the Cabinet Committee on Restructuring on Public Sector Enterprises proposed a four-way split into passenger, freight, infrastructure and management businesses under a reform and privatization strategy.

To date, committees are formed, suggestions presented, policy statements are issued but there has never been any tangible outcome which could qualify as an action in the right direction.

If the government shows political will and prudence in turning Pakistan Railways around, the options are many, what is not an option is to thimblerig policy statements without any action.

This text originally appeared in Dawn, the largest newspaper in Pakistan. The author is CIPE’s Pakistan Country Director.

Wednesday, January 12, 2011

Financial hemorrhage goes unabated

State-owned enterprises (SOEs) are among the serious and chronic ailments of Pakistan’s wobbling economy. They are responsible for hemorrhaging around $3 billion in the fiscal year 2010. The amount is two-thirds of annual defense budget and double the promised annual Kerry-Lugar-Berman assistance to Pakistan. SOEs are the major drain on Pakistan’s budget and devour public resources without any remorse and compunction. The corporate behemoths in the form of SOEs have been maintained by successive governments to fulfill their own political agendas. Governments have bald-facedly resorted to granting excessive and out-of-merit employment at all levels, causing acute inefficiencies, terrible public service, and deep-rooted corruption.

Even if at some places there are honest people whelming the affairs, by virtue of their training and background, they cannot run enterprises like business managers. They lack business acumen and will be shy to take pure investment decisions like entrepreneurs or professional business executives. Their promotions or reward system is not linked with business performance. They might be competent in matters related to administration but political appointments and politicized unions are what they have to constantly manage instead of applying their minds to making the organization commercially viable.

Staffing of SOEs is a highly politicized matter. Last year the government passed a bill to reinstate hundreds of thousands of employees, who were let go by the earlier governments, with retrospective benefits. There is no provision for investigating whether those reinstated employees are already employed somewhere else or established their own business. As a consequence, they will reap the windfall benefits at the cost of others who are deprived of jobs or entrepreneurship opportunities. Regrettably, SOEs that are publicly listed and therefore partly owned by individuals, companies, and mutual funds had no say in this bill even though under the Code of Corporate Governance such decisions are to be made by the board of directors. Instead, the costly employee reinstatement decision was made by a direct intervention from the majority shareholder – the government. This law will no doubt be a cause of further financial hemorrhage to the SOEs and make them crippled in the long term.

Thus, privatization in a transparent and open manner is the only way to unlock and unleash the pent-up productive potential of the nation’s resources and add significant value to those assets. Since the early 1990s, governments have pursued a significant privatization programs but unfortunately the process has come to a screeching halt since 2008. Due to Pakistan’s poor image worldwide, foreign investors are shy of investing in the country. Therefore, the government should use the secondary offering of already listed companies in order to generate much needed funds to reduce state borrowing and curb inflation. With the recent appointment of Chairman and Commissioners, the Securities and Exchange Commission of Pakistan should also be given the governmental mandate to introduce a Code of Corporate Governance for SOEs. The appointment of competent boards of directors and professional management will enable these SOEs to function more efficiently and thereby pave the way for their privatization.

Subsidies given to SOEs discourage the potential of the private sector. In contrast, competition in the private sector minimizes inefficiencies. One example of how privatization can help increase productivity and benefit consumers is the transformation of Pakistan’s telecommunication sector. The state of affairs in that sector was dismal until the privatization of PTCL (Pakistan Telecommunication Company Ltd) and granting of licenses to new mobile companies. The spirit of private enterprise has truly revolutionized the way the nation now engages in communication. Ten years back it was unimaginable that one day we will make a transatlantic call just for two rupees! That is the fruit of privatization.

Pakistan has no other option than to create a productive economy that generates sustained economic growth. For one, the recent rollback of oil price hike under political pressure will exacerbate the economic woes of the government. Similarly, the implementation of the Reformed General Sales Tax (RGST) has been postponed until September due to political pressure but will once again surface when the Finance Ministry finalizes its negotiations with IMF on extending the country’s loan where tax reform is one of the conditions. Now that the government gained some breathing space from political pressures, in the next six months it must deliver on implementation of the effective measures for anti-corruption and improving transparency, reducing the size of cabinet and its expenditures, and introducing the Code of Corporate Governance for SOEs. This will restore the image and confidence of economic managers who then will be able to gain support of parliamentarians for tough economic policy decisions – and the media will also have success stories to report.

Thursday, December 9, 2010

Is RGST the only solution?

Startling disclosures by Wikileaks, though, have put the Reformed General Sales Tax (RGST) on lesser priority of public debates; yet, the issue cannot be overlooked as it carries the potential of having serious impact on political economy of the country.

Rational and spirited arguments are being given in favor and against the RGST. Some say it will add to inflation and others claim that it is necessary to bring people in the wider tax net and RGST is meant to fulfill that objective. If RGST’s purpose is only to document the economy and not the revenue collection per se, then the rate could be suggested @ 10%. Had it been so, the idea of documenting the economy through RGST could be sold to the nation effortlessly and tastefully. But that is not the case in reality. Fact of the matter is that government is cash-starved. IMF’s assistance depends on implementation of RGST with stiff commitment otherwise the Fund may delay the release of assistance and functioning of government machinery may face serious troubles. Against government’s argument for more documented economy, the counter argument is that instead of widening the tax net, it will burden those that are already paying the taxes. Heavy opposition from the political parties, particularly those in the coalition government, coupled with lack of effective collection mechanism, is perhaps a true reflection of public views against RGST.

Government can negotiate this conditionality with IMF provided it brings honesty and financial discipline in its own working. From 1998 to 2001, Musharraf regime was running the affairs of country with only 10 ministers and without any nostalgic feelings. The current government has an army of around 40 ministers and 17 state ministers and their performance on ground is highly questionable. The money spent on the maintenance of ministers and state ministers could be saved to off-set partly the adverse impact of RGST. It was surprising that recently two more ministers have been added despite the fact that larger group miniseries is causing a heavy burden on national exchequer.

The larger cabinet has not been able to function effectively. In fact, it has raised the standards of corruption to new levels. According to Transparency International, the average expenditure on bribery/household is Rs 10,537 per annum. Based on a population of 169.58 million and 8 members/house, the cost of bribery works out to Rs 223 billion; an increase of 11.37 % from 2009 which was Rs. 196 Billion. According to an estimate, the amount of tax evaded is in the range of 50 to 60 billion rupees. If the government can plug the points of corruption and reduce the size of ministries to at least half, majority of the financial woes of the government can be solved without such conditionality.

Mounting budget deficit is also a major cause of concern, although the government is directed by IMF to curtail budget deficit at 4.7%, economist fear that with the going trend, it will be in the range between 6% to 6.5%. It is highly debatable that in this situation, increasing tax revenue will not benefit the public at large, but the fear is that the additional money will be siphoned off due to massive financial indiscipline. Luckily, international oil prices have recently come down from over $80 per barrel to around $78 per barrel. This phenomena, if continues, will be a bit of relieve on the current account, but increase in the inflationary pressure from a manageable 10% over 15% coupled with a decline in the economic growth from expected 4.5% to current 2.5% might push the country in the negative real growth trajectory and coming out of this situation will require massive revenue generation and business friendly reforms, particularly in the area of agriculture tax, privatization and introduction of Code of Corporate Governance in the State Owned Enterprises.

In conclusion government must focus on reviving businesses that are already affected due to energy crisis, reducing the cost of doing business, and combating corruption. Pakistan is certainly market economy, once businesses have confidence in government policies that are providing a level playing field, jobs will be created resulting in revenue for the exchequer.