Privatization & Restructuring Institution

The following article has been published in Daily Nation, dated 10^th August 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-08-10/page-9)

(Online: http://nation.com.pk/business/10-Aug-2015/privatisation-and-restructuring-institutions)

Privatization & Restructuring Institution

By: Omer Zaheer Meer

Public enterprises and organizations are those that are owned by governments. They can be governmental departments or government owned/controlled corporations. Privatization is a controversial phenomenon commonly defined as the transfer of ownership of property or businesses from a government to a privately owned entity. It is also described as the transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange.

Privatization is put forward as a solution to the economic woes of a country by a section of economists led by the likes of International Monetary Fund (IMF) and World Bank (WB). One of the main arguments for the advocates of privatization of publicly owned operations is the supposed positive change in efficiencies resulting from private ownership driven by a focus on profit maximization. While this theory has its merits, one needs to consider the local context to appraise the potential outcomes. Past experiences can always be a handful when deriving objective conclusions. Unfortunately the above argument does not seem to hold merit for Pakistan. Moreover the economic detractors of privatization argue that vital services needs to be efficiently provided by the state and the fact that privatization does not have a very bright history in third world countries.

Besides, an interesting economic phenomenon has been in the making for past few decades with public sector enterprises turning towards efficiency based corporate models while still ensuring the provision of cost-effective services/products to the local populace. They then expand into foreign territory and use their capital bases to derive profits which are funneled to grow the organization and subsidize the local population. A case in point is Etisalat, a public sector enterprise from UAE currently controlling a privatized public sector enterprise PTCL in Pakistan. This is phenomenal as it nullifies all the arguments of pro-privatization proponents in Pakistani context as a foreign public sector enterprise is now running the major section of telecommunications services in Pakistan.

Pakistan certainly has its own dynamics to consider with lessons to be learnt from past privatization experiments. The privatization of PTCL (Pakistan Telecommunications Company Limited) to the UAE based Etisalat group by the ex President Pervez Musharraf’s regime has been a disaster of sorts. Firstly the control of PTCL was transferred for a paltry stake of 26%. Moreover, PTCL which was generating profits of billions of PKR before privatization has been reporting heavy losses since despite increased tariffs and with a falling standard of customer service often complained about by masses. Moreover, the initial investment was allowed to be made in installments with a material amount ($ 800 million) still outstanding. This was perhaps a one-off badly executed privatization transaction as stated by Mr. Zubair Umar, the Chairman of Privatization Commission. So let us briefly touch upon another privatization experiment in Pakistan.

The now infamously inept KESC was also privatized with high hopes of a turnaround with substantial investments forecasted by the new private stakeholders in decaying infrastructure. Unfortunately none of the expectations have been met. The efficiency has gone down. Rather than investing in the infrastructure, the private party has sold the premium copper wires replacing them with cheap stuff resulting in increased line losses and breakdowns. Infact it has become a bigger strain on public resources then before privatization still requiring continuous rescue injections by the government. But the new private owners continue to happily remit their profits abroad.

Not only has the government of Pakistan lost revenues from the healthier dividends’ streams and resulting taxes, it has also lost by falling share prices of its remaining stake in these entities. The public has suffered a deteriorating service and higher prices. The question then is as to what could be an effective solution to deal with the loss-leading white elephants within the realms of the public sector?

In developed countries strict legislation is in place to ensure the common pitfalls of privatization are avoided, interests of all shareholders are protected and the continuation of a minimum standard of services. This needs to be done in Pakistan too in order to address the issues already facing us from past privatization ventures which effectively handed over whole of public sector enterprises (PSEs) for a paltry minority stake in ownership.

Going forward, a proper plan of action is needed for loss generating entities like PIA, Pakistan Railways, e.t.c. With a proper plan and political will there is no reason why the government cannot introduce checks and balances along with necessary incentives to induce a turnaround they expect from private investors. While some proponents of the privatization point out the previously failed attempts at turning-around of state institutions, they conveniently ignore the major reasons of failure in undue interference, political appointments and misappropriation by government officials which can be avoided.

The success stories like the successful turnaround of a loss-making steel mill into a profitable enterprise are also conveniently forgotten. The same institution is again in ruins but can revert to its’ past standards. The privatization proponents also choose to set aside the fact that if enterprises like PIA are privatized, which have the highest ratio of employees per aircraft of almost 500 compared to international standards of fewer than 150; it will still lead to layoffs and resulting backlash which can be better handled within the realms of a public sector restructuring.

Establishment of an independent and empowered restructuring institution (RI) to overhaul PSEs can make the restructuring process less resented compared to a private venture while still ensuring provision of cost-effective quality services to the masses from a revenue-generating asset of the nation. Competent professionals of utmost integrity can be placed at top positions based solely on merit to run the PSE’s with introduction of a system of appropriate checks and balances run by professionals. Performance based packages can be offered spurring motivation and ensuring excellence via improved performances.

This can be further elaborated in that all successful private businesses hire top-notch professionals at lucrative packages with performance based pays. The results are professionally run and highly profitable ventures. There is no reason why the services of similar professionals cannot be engaged by Government which can even convert PSEs into Public Corporations which while still adhering to Government regulations will be allowed to follow professionalism, efficiency and mechanics of a modern enterprise.

If for some reasons a privatization is still deemed necessary then appropriate selection of non-vital and loss making PSEs along-with stringent laws safeguarding the national interests as well as protecting the masses should be ensured. The process should be transparent and properly outlined with ground work done to attract best possible investments. This can help reduce lower efficiency by private investors, increased unemployment, inflation, loss of revenues and forced government bailouts as witnessed in the past.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Must Read: Malcolm X’s Letter from Makkah

Source: Malcolm X’s Letter from Makkah (Original post from MyMFB.com)

Malcolm X, or Al-Hajj Malik El-Shabazz, is one Muslim who saw the light of true Islam through his Hajj in April 1964.  As a former member and speaker for the Nation of Islam, a black spiritual and nationalist movement, he believed that the white man was the devil and the black man superior.

After leaving the Nation of Islam in March 1964, he made Hajj, which helped change his perspective on whites and racism completely.

Here is an excerpt of a letter El Hajj Malik El Shabazz wrote a letter to his loyal assistants in Harlem… from his heart, telling them of his experience.  In it, he explains what it was during this blessed journey that made him so profoundly shift his perspective on race and racism.  We should keep in mind that this letter was written in a time when the history of African Americans in America was in making, a time when centuries worth of oppression was being spoken about and condemned in public.

“Never have I witnessed such sincere hospitality and overwhelming spirit of true brotherhood as is practiced by people of all colors and races here in this ancient Holy Land, the home of Abraham, Muhammad and all the other Prophets of the Holy Scriptures.  For the past week, I have been utterly speechless and spellbound by the graciousness I see displayed all around me by people of all colors.

“I have been blessed to visit the Holy City of Mecca, I have made my seven circuits around the Ka’ba, led by a young Mutawaf named Muhammad, I drank water from the well of the Zam Zam.  I ran seven times back and forth between the hills of Mt. Al-Safa and Al Marwah.  I have prayed in the ancient city of Mina, and I have prayed on Mt. Arafat.

“There were tens of thousands of pilgrims, from all over the world.  They were of all colors, from blue-eyed blondes to black-skinned Africans.  But we were all participating in the same ritual, displaying a spirit of unity and brotherhood that my experiences in America had led me to believe never could exist between the white and non-white.

“America needs to understand Islam, because this is the one religion that erases from its society the race problem.  Throughout my travels in the Muslim world, I have met, talked to, and even eaten with people who in America would have been considered white – but the white attitude was removed from their minds by the religion of Islam.  I have never before seen sincere and true brotherhood practiced by all colors together, irrespective of their color.

“You may be shocked by these words coming from me.  But on this pilgrimage, what I have seen, and experienced, has forced me to rearrange much of my thought-patterns previously held, and to toss aside some of my previous conclusions.  This was not too difficult for me.  Despite my firm convictions, I have always been a man who tries to face facts, and to accept the reality of life as new experience and new knowledge unfolds it.  I have always kept an open mind, which is necessary to the flexibility that must go hand in hand with every form of intelligent search for truth.

During the past eleven days here in the Muslim world, I have eaten from the same plate, drunk from the same glass, and slept on the same rug – while praying to the same God – with fellow Muslims, whose eyes were the bluest of blue, whose hair was the blondest of blond, and whose skin was the whitest of white.  And in the words and in the deeds of the white Muslims, I felt the same sincerity that I felt among the black African Muslims of Nigeria, Sudan and Ghana.

“We were truly all the same (brothers) – because their belief in one God had removed the white from their minds, the white from their behavior, and the white from their attitude.

“I could see from this, that perhaps if white Americans could accept the Oneness of God, then perhaps, too, they could accept in reality the Oneness of Man – and cease to measure, and hinder, and harm others in terms of their ‘differences’ in color.

“With racism plaguing America like an incurable cancer, the so-called ‘Christian’ white American heart should be more receptive to a proven solution to such a destructive problem.  Perhaps it could be in time to save America from imminent disaster – the same destruction brought upon Germany by racism that eventually destroyed the Germans themselves.

“Each hour here in the Holy Land enables me to have greater spiritual insights into what is happening in America between black and white.  The American Negro never can be blamed for his racial animosities – he is only reacting to four hundred years of the conscious racism of the American whites.  But as racism leads America up the suicide path, I do believe, from the experiences that I have had with them, that the whites of the younger generation, in the colleges and universities, will see the handwriting on the walls and many of them will turn to the spiritual path of truth – the only way left to America to ward off the disaster that racism inevitably must lead to.

“Never have I been so highly honored.  Never have I been made to feel more humble and unworthy.  Who would believe the blessings that have been heaped upon an American Negro?  A few nights ago, a man who would be called in America a white man, a United Nations diplomat, an ambassador, a companion of kings, gave me his hotel suite, his bed.  Never would I have even thought of dreaming that I would ever be a recipient of such honors – honors that in America would be bestowed upon a King – not a Negro.

“All praise is due to God, the Lord of all the Worlds.”

Malcolm X saw and experienced many positive things.  Generosity and openheartedness were qualities which were impressed on him by the welcome which he received in many places.  He saw brotherhood and the brotherhood of different races and this led him to disclaim racism and to say:

“I am not a racist… In the past I permitted myself to be used… to make sweeping indictments of all white people, the entire white race, and these generalizations have caused injuries to some whites who perhaps did not deserve to be hurt.  Because of the spiritual enlightenment which I was blessed to receive as the result of my recent pilgrimage to the Holy City of Mecca, I no longer subscribe to sweeping indictments of any one race.  I am now striving to live the life of a true Sunni Muslim.  I must repeat that I am not a racist nor do I subscribe to the tenets of racism.  I can state in all sincerity that I wish nothing but freedom, justice and equality, life, liberty and the pursuit of happiness for all people.”

source:

From The Autobiography of Malcolm X with assistance from Alex Haley, the author ofRoots.

Resolving the Banking Transactions’ Tax Crisis

The following article has been published in Daily Nation, dated 3^rd August 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-08-03/page-9)

(Online: http://nation.com.pk/business/03-Aug-2015/resolving-banking-transactions-tax-crisis)

Resolving the Banking Transactions’ Tax Crisis

By: Omer Zaheer Meer

As discussed on these pages before the controversial decision of levying a withholding tax on all banking transactions for non-filers (0.3% till September and increasing to 0.6% thereafter) with the underlying aim of broadening the tax base has not been able to gain acceptance in the presence of serious flaws within the taxation system along-with prevalent corrupt practices. Even if one ignores the increase in the inflationary pressures in the economy and the penalization of ordinary salaried class, the reservations of traders alone are sufficient to make this highly controversial. The disagreement on this matter has now reached a dead-lock between traders and the incumbent Government. So exactly what are their reservations and how can they be possibly addressed? Is there any possible solution for the same?

First of all the withholding tax introduced is more of a transactional tax then an income tax. But more importantly the issue at hand is one of a lack of trust in the system. Not only do the traders fear to be targeted unfairly once they bring themselves in the system to avoid the transactional tax, they haven’t seen the remedial procedures effectively providing relief in an event of witch-hunting by FBR either. Many economists are of the view that introducing new taxes to compensate for FBR’s failures is simply not the answer to Pakistan’s economic and tax woes. The reasons for FBR’s failures are numerous ranging from dissatisfaction amongst FBR’s employees to structural inefficiencies in the taxation system. They’re however not the topic for today and will be discussed at another time.

For now the issue of the trust deficit particularly in the business community is discussed. Besides very high rates of both direct and indirect taxes, the harassment by FBR and blockade of due refunds are often used as tactics by FBR officials to meet their targets. This actually puts off many genuine businessmen who would otherwise like to contribute their dues to the society. Therefore they claim to resort to the alternate in doing charity and stressing that they evade getting within the ambit of the formal documentation to avoid the horrible experiences many of their fellow traders have endured in their dealings with the FBR. None of these issues are of a nature which cannot be positively addressed. Infact this writer has repeatedly proposed several structural reforms including the ones addressing these very issues.

For example the policy of volume over rates can be pursued. It’d entail reducing all the taxation rates to single digits making it economically prohibitive to evade due to the higher costs of engaging professionals as well as fulfilling the demands of the corrupt officials within the tax apparatus. The focus will be to broaden the tax base using indirect taxes for this purpose while direct taxes can be applied on a progressive basis, increasing with the income brackets. If tunnel vision can be shunned then the positive potential of this can be envisioned. Currently less than 0.5% of the population files a return. The number has declined over past four years despite all the “efforts” for broadening the tax base. If this number can be increased to several millions with a consequential increase in the tax base and tax payers, one can envision the positive impact on tax collections.

It’ll be interesting for the readers to know that the honorable finance minister Mr. Ishaq Dar himself used to be a proponent of this proposal during his days of serving the Lahore Chamber of Commerce and Industry. Surprisingly, now that he’s in a position to actually enforce this much needed reform, he’s shying away from it. Moreover the effective implementation of the relief mechanisms and laws can help assure the tax payer. The time limits for deciding the disagreements should also be enforced. For a change, the tax officials can be trained to respect the tax payer instead of treating them as an assumed criminal. Such measures can go a long way to win over the trust of the taxpayers in the system.

Even in the past negotiations between traders and Government officials, the issue of the undue nuances caused by FBR to genuine businessmen resulting in most businesses staying out of the system to avoid these troubles has been raised. Similarly promises were made with traders to review the exorbitantly high rates of withholding taxes deducted in advance. Some of these taxes are treated as non-adjustable even in case of a loss. Even those that are considered adjustable are extremely hard to recover as the FBR seems to have an unwritten rule regarding refusing even the genuine refunds to loss-making businesses when they need their cash the most. However the same FBR seems content to issue refunds to or defer recovery of tens of millions from influential parties. Such behavior doesn’t instill the trust in the business community.

The latest on this issue is the breakdown of the negotiations between Government and traders resulting in strikes been called and social media campaigns been setup. The reduced rate of 0.3% till September has also been turned down by the business community for the reasons discussed above. A successful strike was already observed with the traders threatening to go all out towards a civil disobedience. Government on the other hand has ordered investigations into the affairs of top leadership of traders.

Possible ramifications of this standoff can be damaging for the national economy and the issue needs to be resolved amicably. One possible solution can involve doing away with this transactional tax and reducing the withholding and sales tax rates immediately pending a review of other structural reforms in return for voluntary registration of a minimum number of businessmen. There are many other possible proposals to this effect too. The ball is now in Governments’ court to decide whether it is serious about introducing reforms to win over the tax payer and broaden the tax base or if it simply believes in coercive measures which may seem beneficial in meeting short-term targets but will surely cause damage in the longer-term.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk