Monday, August 8, 2011
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.
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.
A train passing Tawinda Saway Khan station near Rahim Yar Khan, Pakistan (Image: www.pakrail.com)
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.