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.

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.

Positive Side of Floods

Although Pakistan is still reeling in sprinting waters of the worst floods, that is only one side of the story. Every cloud has a silver lining and the floods, having claimed many lives and caused displacements and destruction, have also brought many opportunities that our nation can leverage. First, it is an opportunity afforded to us by nature to ponder and reflect upon our past policies related to water conservation and building of water reservoirs. If we don’t awake and reflect NOW, then when will we?

The floods are a wake-up call for the entire nation to come out of political agendas and start thinking how to build water reservoirs that can be channeled to create energy and irrigate fields. We are an energy-starved nation and will create electricity only if we put wanton waters on a tight leash. Nations get united in calamities and catastrophes and which bigger calamity or catastrophe we still wait for? Is this the last flood? Nobody can say. What if next monsoon rains repeat the same behavior?

Second, floods distribute large amounts of suspended river sediment over vast areas. In many areas, this sediment helps replenish valuable topsoil components to agricultural lands and can keep the elevation of a land mass above sea level. In the disguise of destruction, maddening waters bring nutrients and micronutrients which our lands desperately need to enhance per acreage yield. The Indus River will refresh and reshape its river bed and may transfer rich sediments to the canals linked with it. Floods, in their flow, shake up the soil to a sufficient depth, oxygenate it, empower its richness and restore its strength. Lands, severely struck by floods, will produce more crops in the next seasons.

Many areas of Pakistan are facing problems with water salinity and acidic potable water. Reservoirs of flood water will help push salinity and acids to a sufficient depth into the water beds. The potable water will be purer and more hygienic in these areas. The water beds in northern Sind and southern Punjab provinces are losing their levels. These water beds are slipping downward incessantly. The recent floods will help increase the surface of water beds to the required level.

Third, another area where floods have played havoc is the livestock. According to estimates, over 100,000 cows, buffaloes, goats, sheep, horses, camels and donkeys have been lost and 3,000 fish farms and 2,000 poultry farms destroyed across the country. For economic empowerment, besides providing shelter, there is a greater need of livestock and therefore it is an appropriate opportunity to import best breeds of animals and distribute them among farmers.

Fourth, with destruction of infrastructure such as roads, bridges, telephone and electricity poles, there is a bright economic opportunity for sectors related to construction like cement, bricks, paint, iron, etc. Internally Displaced People (IDPs) whose main livelihood hinged on agriculture or livestock could find immediate jobs in the construction sector giving them temporary relief from unemployment caused by loss of crops. The floods are providing bright opportunities of consistent employment for unskilled labor over the next at least five years.

Fifth, the irrigation sector of Pakistan was already in a shambles before the floods. The slippage of water upstream and inability to reach the needy areas was a hallmark of the system. According to irrigation expert, Idrees Rajput, “Water levels in Sindh rose to similar high floods in 1992 and 1976 but the impact was not as huge. This time, flooding has been exacerbated only due to decades of government corruption and neglect (in irrigation departments).” That is a great opportunity to raise and re-build the entire system of irrigation utilizing the latest technologies. Private investments can be wooed to build and operate the systems.

No doubt the floods have made a deep impact on the country’s resources but at the same time there are opportunities in many sectors. To safeguard the interests of young and upcoming generations, the need of the hour is to absorb this catastrophe with patience, wisdom, good planning and implementation instead of continuous squabbles!

Nightmare of Post Floods Land Management in Pakistan

Living in the modern age of computerization and digital identification, Pakistan still languishes in an era of stone-age Land Management System. According to a study Land Administration System in Pakistan – Current Situation and Stakeholders’ Perception conducted by Zahir Ali and Abdul Nasir, the current land administration system in the country aims at land revenue assessment and tax collection for fiscal purposes. This system is structured on the traditional land registers and cadastral maps in paper formats, and their maintenance is mainly dependent on local land administrator, the so-called “Patwari”. Although the local administrator reports all changes on land rights and boundaries of land parcels to the higher level of government authorities, the maintenance and quality of these registers has always been questionable. The limited accessibility and reliability of these records restricts the operational and legal usefulness for securing land ownership as well as for carrying out reliable planning and development activities. Additionally, Privatization program of Pakistan has also suffered from this lack of clean title and property rights. The government had sold to Etisalat 26 per cent shares of country’s telecom operator in July 2005. According to a news item of 18th June 2010 because of a dispute over the legal transfer of land and property titles, buyer has been holding back payment of about $800 million of the $2.6 billion PTCL’s privatization proceeds.

The land management system in Pakistan will now be put to its ultimate test by the nature in the form of floods of the century. When the floods recede, one of the most serious after-effects will crop up in the shape of land grabbing and fake demarcations of boundaries washed away by wanton waters. While In Punjab and Sind, the computerization is in bits and pieces, most of the land record in Khyber-Pakhtunkhwa was still being maintained manually. In cases where the record has been computerized, the land demarcations can be verified by retrieving the data but it would be next to impossible to stop land grabbing of areas with damaged or lost record. The demarcation of land holdings of farmers, erased by the flood water, would be difficult to locate, especially in case of small holding, in all the affected provinces. Venal minions of revenue department will have hey days in connivance with unscrupulous and conscienceless land-grabbers. 

'Do or Die' situation will evolve for the farmers whose livelihood mainly hinges on the small tracts of land they hold. Before starting the rehabilitation and resettlement process, the revenue departments have got to act at meteoric speed to remove these fears and take immediate concrete steps so that land grabbers find it extremely difficult to rip off the already devastated farmers with their piercing fangs and talons. 

One of the major problems that will emerge in Sind is that in 'Katcha' area where most of the people move from one place to another without having any proper land ownership documents. The government must take this task seriously and provide these people some documents to confirm their legitimate ownership. However, the areas that are fortunate enough to have been safe from floods, it is expected that the land record would be safe. So, no excuses should be allowed to play for drawing fake lines of demarcation. 

To ensure transparency in the entire process of land demarcation, government must constitute committees consisting of peoples’ representatives, retired judges and social workers are known for their honesty, integrity and uprightness. 

In case, the respective provincial governments failed to rise to this humongous challenge thrown by the nature, there will be deluge of civil litigation, feuds and murders down the road. The judiciary and civil administration is already over burdened. An injudicious and myopic handling of the land record phenomenon will unfold into situation that our generations will rot in the courts to seek justice which will remain will-o'-the-wisp for the common man for centuries.

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