Taxation Trends in Pak in the Need for Reforms

The following write-up was published in the Jan-Mar 2018 Quarterly Edition of “Policy Insights”, the largest global accountancy body ACCA’s regional publication covering MENASA

Link: ACCA’s Policy Insights’ Published Link

Link: Main Page

Fiscal Reform: Taxation Trends in Pak in the Need for Reforms

By: Omer Zaheer Meer

Taxation laws are set of laws to derive revenues for the Government to function & service the citizens with the aim of improving their quality of life while continuously improving the facilities and infrastructures provided. Pakistan has a complex taxation system with a focus on indirect taxes with over 70 different taxes. This has led to several sets of laws dealing with specific taxation areas. Below are some major issues highlighted in need for major fiscal reforms:

  • Extremely Low Numbers of Income Tax Returns Filers:

From approximately 1.32 million income tax returns filers in tax year 2016 to fewer than 1.3 million as per last available data in 2017 is an area of major concern. In a country of over 220 million, this amounts to just 0.6% of the total population.

  • Undocumented, Black economy:

This builds up from the above issue of low return filers. A larger proportion of the economy, some estimates put the number close to 100% of the GDP. This by any standard is massive and a point of major concern.

  • Taxation Complexities and Ease of Doing Business:

As mentioned above, Pakistan has a very complex tax system and the recently released data by the World Bank has placed the country on a ranking of 147 out of 190. The complex, non-harmonized and multi-layered laws in operations not only make it more expensive but also time-consuming for the businesses.

  • Harmonization Issues:

The issue of lack of harmonization among various laws increased many-fold post the devolution of Sales Tax on Services regulation and administration to the provinces and each Province setting up its own Revenue Authority for the same. In an era, when countries are agreeing to facilitating arrangements on the likes of European Economic Area, making borders irrelevant in terms of economic activities, Pakistani businesses are facing the traditional challenges while expanding their businesses in other provinces within the same country.

  • High Costs of taxation:

In addition to having one of the most complex taxation systems in the world, Pakistan also has high taxation rates compared to other countries in the region. Furthermore the taxation rates are also several times that of the cost of tax avoidance in the country, making it an attractive proposition for some businesses to keep operating beyond the radar of the legal economy. Moreover, the highly complex nature of the taxation regimes also translates into further costs for taxpayers in terms of the time and administration required to ensure compliance.

  • Structural Issues:

The structural issues including confusing and highly subjective laws, focus on indirect taxes, the improvable systems, mal-practices, singular focus on revenue collection, harassment of the existing taxpayers rather than using the same resources to focus on expanding the tax base and a general ill-perception have all contributed to the current state of affairs and needs to be reformed if the situation is to improve.

  • Conclusion:

The above issues are requiring serious efforts to address the critical issues concerning the taxpayers particularly the businesses in the country. With CPEC and its associated possibilities materializing, now is a good time to ensure these reforms are put to action to achieve the full potential of not only the existing economy but also the developments accruing. We’ll discuss the possible proposals for reforms in the next issue. Till then, we leave our readers to ponder over these issues.

 

The writer is a leading economist who is also a qualified chartered certified accountant, chartered financial analyst and anti-money laundering expert. He’s sits on the Global Tax Forum of ACCA and is the sitting Chairman Liaison Committee of LTBA and ACCA’s Taxation Committee in Pakistan. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Recognising our regular contributors…
Nayeema Bashar receives a certificate of appreciation and Omer Zaheer Meer wins Pakistan’s national Member Advocacy Award.

 

Inefficiencies failing the Tax Apparatus in Pakistan

The following write-up was published in the Oct-Dec 2017 Quarterly Edition of “Policy Insights”, the largest accountancy body ACCA’s regional publication covering MENASA

Link: ACCA’s Policy Insights’ Published Link

Link: Main Page

Inefficiencies failing the Tax Apparatus in Pakistan

(by failing the genuine Taxpayers)

Federal Board of Revenue (FBR) is a semi-autonomous federal institution that is responsible for auditing, enforcing and collecting revenue for the government of Pakistan. It’s one of the most critical components of the revenue collection apparatus in Pakistan. As such it is supposed to be the pinnacle of professionalism, discipline and support to tax payers.

During the last budgetary season, Chairman FBR invited this writer, while representing ACCA (UK) and LTBA at a historic pre-budget seminar that was organized with the collaboration of ICAP, ICMAP, ACCA, LTBA, PTBA, LCCI and several other Tax Bars, to send him proposals about the issues in and reforms for FBR. Below is a brief overview from that perspective.

Currently there are approximately 1,210,000 active income tax return filers as per the FBR directory issued in August 2017, out of a population of roughly 218 million in Pakistan. This is a meager 0.55% of the total population. A huge proportion of these filers, file NIL returns is another topic. On the other hand every Pakistani is paying indirect taxes on whatever they consume. The evident lack of trust of the taxpayers on the system and the resulting regressive taxation policies are a big hindrance in the attainment of an optimal taxation system. We’ve often discussed the problems with the taxation policies in Pakistan and proposed practical solutions. Frankly speaking there is only so much FBR can do in this regard since the policies are often driven by the IMF, World Bank and/or the political interests in the country. However the areas where FBR can and should play a very effective role are not in the best of states either.

Considering the tiny tax base it was only natural for FBR to attempt to broaden it. However the way they went about it, has been unprofessional to say the least while messing up a good endeavor big time. Notices claiming no existing tax registration based on “economic activities”, usually citing vehicle purchases were sent out to masses. Sounds positive? Hang on, what if it’s shared with you that many of those receiving these notices were not only tax payers already registered but paying millions in Income Taxes annually? This exemplifies a total lack of coordination within the systems and functions of FBR, which is unfortunately becoming a norm of late. Missing out on the records already held by FBR simply reinforces the misconceptions amongst the tax payers that FBR is out to bother already registered tax payers instead of acting as a facilitator and initiating genuine drives to catch tax evaders.

What’s tragic is that while on one hand such steps are undertaken citing the need to broaden the tax base but on the other hand proposals with huge potential to broaden the tax base such as bringing agricultural income and other exempt sections within the tax net as well as converting the CNIC into National Tax Numbers (NTN) and Sales Tax Registration Numbers (STRN) for broadening the tax base have been falling on deaf ears for almost a decade now.

To underline the vast difference in the workings of FBR and similar bodies in developed countries, a personal experience is hereby shared with the readers to illustrate the significant gulf between the international standards and the ones practiced in our beloved country. While working in UK, I needed to change my tax code. For ease of understanding you can say it was like claiming a tax refund and I was not even a British national. It took me one phone call to UK’s HMRC (Her Majesty’s Revenue and Customs) during my office lunch hour to get it done by the end of the lunch. Yes, just in less than an hour. Now compare it to the experience of genuine tax-payers in Pakistan who are ridiculed and abused for even minor genuine tax affairs. Presumptive and advance taxes are collected but when it is time to issue refunds in line with the law, actual due refunds are held for months and even years despite completion of all legalities and verification. What is worst is that in most cases the FBR officials verbally accept the cases as genuine but claim that due to the pressure to meet revenue collection targets they are unable to follow the law and deliver the tax payer their due right.

The problem manifests from the nepotism and non-professional attitudes of some officers who treat tax-payers with utmost contempt instead of the dignity they deserve. Un-realistic targets setup by higher-ups then further aggravates the matters with coercive, non coordinated and even illegal measures used by certain sections within FBR. The widespread corruption within the department further worsens the matters.

It’d be reasonable to point out that although PRAL (Pakistan Revenue Automation (Pvt) Ltd) does mess up things at times, many of its’ positive endeavors were blocked for fears of eradicating corruption using different pretexts by certain sections of FBR. For example, PRAL once finalized a completely automated system of issuing refunds to tax payers with even an online payment instrument. Naturally there was a huge hue and cry. The project was dumped and the corrupt manual practices continue to date.

Now as if all this was not enough, even the laws governing the whole taxation system are made mockery of within FBR by several officers undermining the good work and efforts undertaken by their more professional colleagues. Just ask any genuine tax payer or tax practitioner about the treatment meted out to them by most FBR officials and you’d be shocked. Due to limited space, this topic will have to be continued in future write-ups.

As for now, perhaps the policy makers and senior FBR officials should consider this dire situation seriously to rectify all the serious problems within FBR. If they fail to do so, the next time they complain about low proportion of tax payers in Pakistan as compared to UK or other developed countries, they should realize that they only have themselves to blame. 

About author:

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

Privatization: Cure or Disaster for Pakistan?

The following is the original draft of the article published in the renowned “Blue Chip” journal as an Op-Ed  in its April – June 2016 Edition.

Privatization: Cure or Disaster for Pakistan?

Prof Dp

By: Omer Zaheer Meer

Preamble:

Privatization of public enterprises and organizations is one of the hotly debated and contentious economic issues facing Pakistan today. While some term it as a solution to Pakistan’s economic woes, others simply paint it as an attempt to sell national assets for peanuts. The reality perhaps lies somewhere in between. Public enterprises are those that are owned by governments and thereby the public at large. They include government owned/controlled corporations.

Privatization is a somewhat controversial phenomenon in Pakistan. It is commonly defined as the transfer of ownership of state owned assets from a government to a non-state 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 on a stock exchange publicly. However our focus is on the privatization of state owned enterprises.

Privatization Commission:

The incumbent government in Pakistan had constituted a privatization commission to administer the privatization efforts. The commission has shortlisted 31 institutions to “sell” atleast “partially” but with a transfer of control and management including the likes of PIA which resulted in quite a storm of protests lately.

Pro-privatization:

On the face of it, some of the arguments of the proponents of privatization appear to be sound and make sense. Privatization is put forward as a solution to the economic challenges faced by the government of Pakistan by some economists backed by the likes of International Monetary Fund (IMF) and World Bank (WB).

  • It’s pointed out that a government’s primary function is to run the state affairs and it should focus on facilitating the businesses by creating a favorable environment instead of running businesses itself.
  • The strongest argument put forward by the supporters of privatization is that “white elephants” in the shape of loss generating public sector enterprises (PSE) are actually costing the national exchequer billions of Rupees annually which can and must be saved and instead spent on public welfare.
  • Another strong argument for the advocates of privatization of publicly owned entities is the supposed increase in efficiencies resulting from private ownership driven by a focus on profit maximization.

World Bank’s checklist for successful Privatization:

Some of the vital requirements for successful privatization as per none other than the World Bank itself are outlined below. One can judge how almost all of them are lacking in the case of Pakistan, hence the case of past disasters giving a lesson to look elsewhere for solutions. The relevant extract with seven points is shared below:

  1. Privatization works best when it’s part of a larger program of reforms promoting efficiency. New Zealand, the U.K., Mexico, and Chile are all successful privatizers. Their privatizations were accompanied by reforms to open markets, remove price and exchange rate distortions, and encourage the development of the private sector through free entry. Revenue maximization should not be the primary goal of privatization. Far better to eliminate monopoly power and unleash potentially competitive activities than to boost the sales price by divesting into protected markets. Also it is far better to create regulations to protect consumer welfare than to maximize price by selling into an unregulated market.
  2. Regulation is critical to the successful privatization of monopolies. In the sale of Chile Telecom, everybody won–consumers, labor, government, buyers–and the productive efficiency of the company increased as a result of a well-developed, well-administered regulatory framework.
  3. Countries can benefit from privatizing management without privatizing the ownership of assets. Management contracts, leases, and concessions have been successfully used the world over, particularly in sectors where it is difficult to attract private investors. In Côte d’Ivoire, the leased water company improved technical efficiency, increased new connections, became more efficient in billing and collection of receivables –and reduced the number of expatriate employees by 70%. But because a change in ownership is usually needed to lock in performance gains, private management arrangements are likely to work best when they are a step toward full privatization.
  4. The sale of large enterprises requires considerable preparation. Successful privatizations of large enterprises have entailed breaking them into competitive and marketable units (in East Germany, Argentina, and Mexico), bringing in dynamic private sector managers (in many telecom and airline sales around the world), settling past liabilities, and shedding excess labor (in steel and railways in Argentina). Successful privatizing governments also assiduously avoided large new investments for plant modernization and equipment, since getting the private sector to finance and manage these investments was itself a major reason for privatization.
  5. Transparency is critical for economic and political success. Mexico and the Philippines made the sale of enterprises transparent by adopting competitive bidding procedures, developing objective criteria for selecting bids, and creating a clear focal point with minimal bureaucracy to monitor the overall program. A lack of transparency can result in political backlash, as in the early days of privatization in Poland, or even bring the process to a halt, as in Guinea.
  6. Governments must pay special attention to developing a social safety net. In Tunisia, generous severance packages encouraged voluntary departures and reduced the need for outright dismissals. In many countries–most recently in Eastern Europe and Central Asia–employee ownership schemes, unemployment benefits, and retraining-redeployment programs are being developed to ease the social costs of privatization.
  7. In changing the public-private mix in any type of economy, privatization will sometimes be less important than the emergence of new private business. Countries can freeze or restrain the expansion of public enterprises and encourage the growth of a dynamic private sector through free entry, as happened in Korea and appears to be happening in China.

Privatization issues in Pak:

However once we start to dig deeper the situation is not as simple as it may appear at first, more so in Pakistan’s context. First of all a successful privatization exercise has some pre-requisites like those listed above including a conducive environment with investors’ confidence, a strong government able to enforce the agreements, proper selection of non-vital PSE’s and a fair process carried out in a transparent manner. Sans this, privatization cannot turn-around the state of PSE’s or the economy. Pakistan’s past experiences are a testament to this.

Once again the incumbent government is focused on privatization but unfortunately is ignoring the vital pre-requisites. The faulty selection of profitable and strategically vital entities, the extreme haste in the proceedings, missing policy guidelines, a lack of clarity and transparency in processes, non-conducive investment atmosphere and a less-than-desirable track record all warrants caution in examining the proposed solution of privatization.

Amidst the noise of overhauling loss-leaders, several profitable institutions are also earmarked for privatization, which besides funneling billions to the treasury are also providing products/services at cheaper rates to the public as compared to the private sector in the international market.

  • One such example is the Oil and Gas Development Company Limited (OGDCL) which generated a profit of billions of Rupees in last few years while providing the gas at heavily reduced prices as compared to those offered by the private sector in international market.

 

  • Another example is Pakistan State Oil (PSO) generating an after-tax net profit of approximately PKR 21,818,000,000 in the year 2014, a 72.36% increase from the previous financial year. Recently in 2015, it posted after-tax net profit of PKR 6,936,000,000 despite slump in petroleum prices and margins globally.

Privatizing such institutions would not only lead to loss of billions to the exchequer but also an increase in the comparatively cheaper prices currently offered to the masses.

Past Privatization Experiences:

Moreover, while all the pro-privatization arguments have their merits and some may even sound convincing theoretically, one needs to consider the local context to appraise the potential outcomes.

Past experiences can always serve as good benchmark to begin with when deriving objective conclusions. Unfortunately for the proponents of privatization in Pakistan, the above mentioned pro-privatization arguments do not seem to hold merit in the case of Pakistan, based on past experiences of privatized entities. A brief discussion of some key examples below will help us elaborate this observation.

 

 

PTCL:

A case in point is the handing over of PTCL control to Etisalat by the Musharraf regime in which a minority shareholder effectively got all of PTCL for a paltry sum to be paid in installments still partially outstanding.

  • What is iconic is the fact that Etisalat itself is a PSE of UAE. This means that while as per the proponents of privatization “state cannot run vital services”, however it is believed that a foreign state owned enterprise can come to Pakistan and do the same. This nullifies one of the strongest pro-privatization arguments.

 

  • As for the privatization of PTCL, the control was transferred for a paltry stake of 26%.

 

  • And just to analyze how effectively has this privatization venture gone we should realize that the same PTCL which was generating profits of billions of PKR started reporting heavy losses despite increased tariffs and with a falling standard of customer service often complained about. Just recently, PTCL has started reporting some profits.

 

  • Moreover, the initial investment was allowed to be made in installments with a material amount ($ 800 million) still outstanding.

 

  • This is in effect tantamount to allowing a foreign Government owned entity to buy a state asset of Pakistan for peanuts, make heavy funds transfer to its’ home country, not bother to invest in infrastructure and service quality as required and not even pay the agreed upon sum.

This can be labeled as a one-off badly executed privatization transaction as claimed by proponents of privatization including the honorable Mr. Zubair Umar, Chairman of Privatization Commission. So let us briefly touch upon couple of other privatization experiments in Pakistan.

KESC:

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 and instead it has become a much bigger white elephant requiring continuous rescue by the government while the new private owners continue to remit their profits abroad.

 

  • The efficiency has gone down. Their failure to even invest in the necessary infrastructure and maintenance has lead to undue load-shedding over and above that necessitated by load-management.

 

  • Infact, rather than investing in the infrastructure, the news within the business community is that the private party has sold the premium copper wires replacing them with cheap stuff resulting in increased line losses and breakdowns.

Unfortunately this disastrous privatization has also become a bigger strain on public resources then before privatization, still requiring continuous rescue injections by the government. The new private owners however continue to happily remit their profits abroad.

MCB:

If the above still did not convince you, then to put things in perspective let us also recall the privatization of MCB to Mian Mansha led Nishat Group, undoubtedly amongst the strongest business conglomerates in Pakistan.

The deal was done at a fraction of the fair value of the tangible assets of MCB let alone considering the value of the brand and goodwill. Obviously such moves do not boost confidence particularly when the same group’s head attends important government policy meetings, finance the largest party of the country sitting in government and is said to be interested in getting “good” deals on more national assets at the expense of the nation.

Some of these notions can be avoided by ensuring proper mechanisms in place with transparency that masses can see and put their faith in.

Pressure from lending “partners”:

It is therefore interesting to observe that most of the countries in IMF and World Bank lending programs initiate destitution programs even when it is not conducive to the economic excellence due to lack of necessary requisites including strong regulatory monitors. Pakistan’s policy makers unfortunately seem to be treading a similar path.

The common knowledge within economic circles is that the pressure emanating from the terms of the IMF package accepted by Pakistan is the prime reason behind the hasty privatization attempts. This undue urgency leading to lack of planning should be avoided.

The government needs to ensure it is not selling off profitable and strategically vital PSE’s in the name of privatization for short-sighted capital injections at the cost of long-term stability and revenues. Furthermore institutions providing vital services to the masses should not be on the wish-list of the potential sell-offs either.

Privatization’s not a blanket solution:

Continuing further, it would be interesting for the proponents of privatization to read the following extract from a World Bank report on privatization:

“Most privatization success stories come from high-income and middle-income countries. Privatization is easier to launch and more likely to produce positive results when the company operates in a competitive market, and when the country has a market-friendly policy environment and a good capacity to regulate. The poorer the country, the longer the odds against privatization producing its anticipated benefits, and the more difficult the process of preparing the terrain for sale ……………………………. 

Privatization is not a blanket solution for the problems of poorly performing SOEs. It cannot in and of itself make up totally for lack of competition, for weak capital markets, or for the absence of an appropriate regulatory framework.”

Ground Realities:

One need to realize that the ground realities of Pakistan are very different from the dynamics of some developed markets where privatization has been more successful. In all the above discussed privatization episodes in Pakistan, not only has the government of Pakistan lost revenues from healthier dividends 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.

Moreover the economic detractors of privatization argue that the vital services needs to be efficiently provided by the state in addition to the fact that privatization does not have a very bright history in third world countries. 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?

Also, unfortunately the past experiences of privatization in Pakistan does not support the leading argument for privatization advocates that since the private sector is driven by profit, the efficiency and performance of institutions is supposed to improve in private hands. As discussed before, be it PTCL or KESC, not only did their profits but also the standard of their services too nose dived in private hands. It maybe that the private owners mint personal profits but that seems to be sans the necessary investments and benefits expected from the destitution program.

 

Challenges:

The interesting challenge in this regard is as to why the government cannot possibly introduce effective checks and balances along with incentives to ensure a turnaround they expect from private entities.

Moreover, in developed countries strict legislation has been introduced to ensure avoidance of the common pitfalls of privatization, protecting the interests of all shareholders and safeguarding the continuation of service(s). Same needs to be done in Pakistan to address the issues already facing us from past privatization ventures which effectively handed over whole PSE’s for a paltry minority stake in ownership.

Plan of Action:

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 that the major reasons of failure were undue interference, political appointments and misappropriation by government officials which can all be avoided.

Successful Turnaround:

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.

Moreover, the core problem for PIA is the heavy debt financing costs which is crippling it financially. This was discussed in details in a previous research article by this writer on these pages earlier.

New Age Phenomenon:

  • With regards to the privatization debate, there has been an interesting economic phenomenon in the making for the 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 territories 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 controlling the major section of telecommunications services in Pakistan.

Restructuring, not Privatization:

Unfortunately, Pakistan has been the laboratory to test extremes of economic perspectives in Nationalization and Privatization when the cure for its’ economic woes lie somewhere in between as outlined below:

 

  • 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 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.

Conclusion:

To sum it up, privatization alone cannot be termed as the solution to all of Pakistan’s economic woes. Moreover, an out of box thinking is required to spearhead us out of the economic abyss we’re currently in.

We can begin with focusing on creating an environment conducive to doing business while strengthening the institutions and regulatory environment. Meanwhile, what is critically required by the proposed RI as discussed above is to:

  • place top professionals of utmost integrity at the key positions based solely on merit to run the PSE’s

 

  • introduce a system of appropriate checks and balances run by professionals whose life is driven by measuring performance against goals, spurring motivation and ensuring excellence via improved performances.

 

If for some reasons a privatization is still deemed necessary in some instances then:

  • a hurried privatization without a proper policy, appropriate selection of PSE’s and laws safeguarding the national interests as well as protecting the masses should be avoided as it will only lead to less efficiency by investors with conflicting interests, more unemployment, resulting lawlessness, inflation, loss of revenues and government bailouts.

 

  • 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.

By following the above proposals in letter and spirit, there is no reason why we cannot turnaround the PSE into national assets once again.

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

 

PARIS ATTACKS, ISLAMOPHOBIA & $60 TRILLION US DEBT

The following is the original draft of the article published in the renowned “Blue Chip” journal as an Op-Ed in the “Critical Observations” section alongside the write-up of Honorable Dr. Ishrat Hussain in its January – March 2016 Edition

Prof Dp

By: Omer Zaheer Meer

Preamble:

One can and should follow the money trail to reach the underlying root-cause(s) of almost anything in the present day world. This is an undeniable reality requiring us to let go of the emotions that often clog our judgement in favor of a rational examination of the realities. The point stated simply is that it all comes down to economics.

The recent inhumane and highly condemnable acts of terrorism in Paris resulting in violation of the teachings of Holy Prophet PBUH of not harming the non-combatant particularly elderly, women and children. Similarly the consequential increase in the already prevalent Islamophobia which is a violation of basic human rights is equally appalling and condemnable. There are two theories that are doing rounds on social media as to the possible causes of the Paris attacks.

images

The Two Propositions:

The first one stemming from far-right and now engulfing centre-right in the west is that the attackers represents a faith which is intent on destroying everything they hold dear including their freedoms and all that out of a sadistic hate, though no fault of theirs. It points a black a white picture of the world in a very simplistic assertion giving moral high ground to the west.

The second proposition argues that while the attacks are undoubtedly condemnable for targeting civilians, they’re possibly a reaction against oppression of the western establishments particularly France against the Islamic faith ranging from the Setif and Guelma massacres in Algeria to more recently becoming part of the coalitions attacking Muslim countries. The recent the ban on the Muslim Hijab by the French authorities was shocking for most of the Muslim world, more so when taken in the context of the freedoms the French revolution itself vied to protect which was quoted recently when Charlie-Hebdo was felicitated instead of prosecuted under hate-speech and/or incitement to violence legislations on account of publishing despicable caricatures of the most beloved and sacred personality on Earth today, the Prophet Muhammad PBUH.

Hornet’s Nest:

There is also a third, less popular theory on social media claiming that the attacks maybe an inside job with misguided Muslims used to carry out the black-op by certain elements within the power establishment of the western countries. The proponents of this theory points towards the infamous Wikileaks’ claims about ISIS being a CIA sponsored Mossad creation as outlined in the leaked files titled “Hornets’ Nest”. This is dismissed as naïve and a conspiracy theory for the lack of credible evidence and material motive.

35_ISIS-300x231.jpg

Manufactured Consent:

We’re well aware that there can be no action without a cause and often the causes we are shown or bombarded with from the mainstream media are not exactly the true underlying facts but the ones driven by the needs of the vested interests controlling them. This proposition that “the mass communication media are effective and powerful ideological institutions that carry out a system-supportive propaganda function, by reliance on market forces, internalized assumptions, and self-censorship and without overt coercion, by means of the propaganda model of communication” is discussed in detail in Manufacturing Consent: The Political Economy of the Mass Media (1988), by Edward S. Herman and the renowned Noam Chomsky.

While we may never know the real motives and reasons behind such attacks with absolute surety but one thing that is beyond any doubt is that attacks like those in Paris give rise to Islamophobia and further propel an already in motion never-ending cycle of violence. It has led to wider divisions across the globe with the world a much less peaceful place than it was before the infamous 9/11 attacks in USA. It is rightly said that in order to plan the future one should analyze the present and for that to be done, one needs to learn about and from the past.

harry-truman-quote.jpg

Bretton Woods System:

Before proceeding further, let us take a moment to go back to World War II (WWII) to unravel the current global economic order. 730 delegates representing 44 allied nations converged at Mount Washington Hotel in Bretton Woods, New Hampshire, USA for the Bretton Woods Conference during 1st to 22nd July 1944 aimed at “rebuilding” international monetary system.

A key move was to establish dollar as a reserve currency pegged to gold as an alternativet to gold standard for the closing of international contracts. The fact that USA controlled almost two-third of the worlds’ gold reserves at that time certainly helped instill confidence. Moreover USA at that time was enjoying the cutting-edge of technological advancements resulting in huge balance of trade surpluses and consequently its reserves were immense and constantly growing. For global economic stability and USA’s own growth it was deemed necessary to reverse this flow. Although all western nations wanted to buy US exports, US $ had to be accessible to them in order for them to do so. All this together led to the majority ratifying an agreement on the final day setting up the new rules of the game including the setting up of “International Monetary Fund” and the “International Bank for Reconstruction and Development” which culminated in the present day “World Bank”.

1.jpg

USSR declined to ratify the accord alleging it to be an extension of the Wall Street. The Bretton Woods System (BWS) was established in 1945. Post BWS conference, the allies who ratified the BWS discontinued linking their currencies with gold and instead recognized US$ as reserve currency which was still pegged with gold. USA followed the benchmark of 35 US$/oz of gold from till 1971.

Nixon Shock:

The BWS worked as intended for the first few years with Japan and Europe rebuilding under the Marshal plan and the global demand for US exports including machinery, stell, cars, technology, e.t.c. being high. However as Japan and Germany recovered, the US’s share of global economic output dropped to 27% from a high of 35% at the inception of BWS. The costly Vietnam war further worsened the matters for USA with growing public debt, monetary inflation and a negative balance of payments in the 1960’s.

This led to doubts been cast upon USA’s ability to fulfill its’ obligations to convert US Dollars into gold. French started to become particularly critical of what they say as an “exorbitant privilege” for Americans where their citizens had to subsidize American multinationals. These sentiments were economically defined by an American economist Barry Eichengreen as “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.

This led to French president Mr. Charles de Gaulle announcing in the February of 1965 that he intended to exchange the French U.S. dollar reserves for gold. It was a significant move as in 1966, USA’s gold reserves stood at a mere $13.2 billion of which only $3.2 billion were able to cover foreign holdings as the rest covered the domestic holdings. In short, USA simply did not have enough gold holdings to cover its’ dollar liabilities.

The 1970’s started with worrying troubles for USA. West Germany left BWS in May 1971 to revalue its’ currency which actually led to a strengthening of its economy and a drop in the value of US $ by 7.5% against Deutsche Mark. Other nations saw the purpose and began demanding redemption of their US $ reserves into gold. France and Switzerland redeemed and acquired millions of US $ worth of gold. In August 1971, Switzerland also left BWS.

alchemy-and-economics-5-638.jpg

Something needed to be done to save the American economic clout and it was done through what became known as the Nixon Shock. Nixon Shock refers to a series of economic measures by President of USA Mr. Richard Nixon, the most significant of which was the unilateral cancellation of the direct convertibility of the US $ on 15th August 1971, breaking up the Bretton Woods System. The move was complemented with the freezing of American wages and prices for a period of ninety days to combat potential inflationary effects along-with the introduction of an import surcharge of 10 % with the aim of preventing a run on the dollar, stabilizing of the US economy, and a decrease in the US unemployment and inflation rates. It was termed by some circles as a “technical” default by Nixon and thereby USA owing to the fact that it came on the back of the demands by several countries for the redemption of dollar into gold which just was not possible for the USA.

Petro Dollar:

The Nixon shock led to the end of an era where the US economy reaped rich dividends from the US $ being an internationally accepted alternative to the previously prevalent gold-standard. While other countries needed to generate net output and exports for their currencies to be in demand for the global trade, the USA was indifferent to this as the US $ was needed by all the countries to settle their international liabilities.

With the Nixon shock, the era of US $ being the gold standard was over but the era of another phenomenon, the black-gold in the shape of the oil was gaining momentum. While the ashes of WWII gave rise to US economic clout thanks to BWS, another war in the 1973 between the Arabs and Israel gave rise to the phenomenon of petro-dollars. Petro-dollars refer to the dollars earned by selling of oil.

What used to happen was that USA was the largest importer of crude oil and although the global oil trade was priced in US $ since WWII, there was no qualification on settling the contracts in the local currencies.

However, as a result of the USA’s and Western Europe’s support of Israel in the 1973 Arab-Israel war, Organization of Petroleum Exporting Countries (OPEC) declared an oil embargo leading to fears that US $ would now become irrelevant in the global oil trade and hence lead to an era of irrelevance of the US $ thereby causing irreparable damage to the US economy.

On the contrary USA President Richard Nixon somehow managed to deliver an outstandingly brilliant deal for the American people from the ashes of yet another war. He successfully negotiated an agreement with Saudi Arabia for denominating all its future oil sales in US $ in exchange for the right to purchase of arms and protection from USA which inevitably was for the payment of the agreed prices. Other OPEC countries then agreed to similar deals leading to US $ again becoming the global reserve currency, thereby also allowing USA to export some of the inflation.

This meant that anyone who wanted to buy oil, and every country in the world needed to do so to meet its energy needs, now needed US $. Overnight, US $ became the currency in demand. This artificial demand was not based on economic variables or global trade balances but rather the importance of global oil trade allowed USA to issue/export its’ paper currency as reserve currency to be held by all countries. This has also allowed USA to achieve faster economic development on exorbitant levels of borrowed capital despite an ever rising trade deficit. USA could once again print US $ 100 bills for a few cents while the rest of the world needed to deliver actual goods or services worth of US $ 100 to USA.

petro-dollar-system-7-638

On the other hand, the large inflows of petro-dollars in any country impacted the value of the local currency negatively. This made the local economies less competitive due to the inherent disadvantage vs US $.

With the ever rising demand for crude oil over past decades, the OPEC has been fixing the oil prices at very leisurely margins to support a luxurious and non-taxed life-style for its’ people until recently when the advent of Shale gas and other geo-political factors led to OPEC slashing the oil prices.

Bubbled-up Economy:

The above should make it obvious that the USA administrations have used their military muscle to reap rich economic dividends. Wars have suited their economic designs and helped maintain their hegemony across the globe.

Traditionally economists have argued building the fundamentals for an economic rise. However USA has somehow managed to successfully develop a system where the whole world is reliant on the pieces of paper it prints at a minimal cost and ends up subsidizing the high standard of living of its’ citizens and its’ costly wars at the expense of their own citizens.

The gold-standard reserve currency status till 1971 and petro-dollar privilege since 1973 has given the otherwise un-impressive US economy a boost unlike any. The latter has ensured that the fortunes of global economies are tied up with the USA and any damage to the latter’s economy would spiral into a global crises as was evident from the global financial credit crunch in the last decade.

us-economy-2010-2015.jpg

Another Economic War:

As per data released by St. Louis Federal Reserve, the total US debt including that owed by its government, businesses and people is now approaching $ 60 trillion, the highest by any country in human history and negative economic indicators like trade deficits, rising unemployment, inflation, e.t.c. one should not be penalized to analyze the past patterns and see potential economic benefits for USA from another major war or sets of war. While the federal US borrowing is less than a third of this total figure, the total shows the impact of an economy risen to un-comparable heights all from very weak foundation of fundamentals and artificially supported by post-war measures as gold-standard and now petro-dollars.

Chinese Challenge:

The spectacular economic rise of China particularly over the past two decades and the recent assertion of the military might by her in the South China Sea region have posed serious challenges to the American dominated world economic order.

150413150545-economic-growth-2015-780x439

China has made inroads in Africa and trying to gain a foothold in the energy-rich Central Asia. Meanwhile it has already tapped the Middle East with its positive trade balances with them and is now positioning itself for a more strategic role. Should China be able to gain a foothold in the Middle East and most importantly a key position in Central Asia, the American hold on the global oil market would be in danger. This threat is further exacerbated by the Chinese strategic mega-project of China-Pakistan Economic Corridor (CPEC) which will not only give it an access to the world from its western underbelly but also a key port at Gwadar from where it can control the majority of the global oil trade undertaken via sea. Pakistan of-course has a central key role in this new great-game. Furthermore the Chinese-Russian alliance further complicates the matters for USA.

The USA came up with the strategy of containing China a part of which was to encircle it by using regional allies like Japan and Philippines who have territorial and historical disputes with China. This was addressed by the Chinese counter-strategy of strings of pearl which has culminated into “one road, one belt” vision resulting in the now infamous China-Pakistan Economic Corridor (CPEC) strategic initiative.

sinopak4.png

Iraq, Syria, Libya, e.t.c. – Maintaining hold on oil:

It is in this context that one can appreciate the pretext and acceptance Islamophobia provides as the justification of strategic wars for protecting the economic interests of USA. While the masses in USA and Europe would otherwise not agree to bombing of civilians with deaths in millions, such acts are made acceptable by the fear-mongering of Islamophobia.

While most other wars maybe justified under some pretext despite the havoc wreaked in previously stable and peaceful countries now turned into a quagmire of destabilized militias like Syria and Libya, the case of Iraq is unique. Not only was it attacked under false and artificially created pretexts leading to the murders and humiliation of millions of civilians and destabilization of the whole region, it has led to public admission of the “mistake” and apology by several characters involved, most importantly Mr. Tony Blair the PM of UK at that time. It is that the “fairytale” of “weapons of mass destruction” was concocted after Iraq made the grave mistake of announcing that it intended to break the “code” of petro-dollars by allowing trade of its oil in Euros.

What is unjustifiable to a rational mind is that despite this admission and series of evidences over the years proving the concocted nature of accusation leading to the Iraq misadventures and the war crimes committed there on the likes of the infamous Abu-Gharib prison and millions of civilians causalities, no one responsible has been and seems likely to be prosecuted for their wrong doings.

While the human costs of these wars and resulting tragedies have been astounding, they have helped maintain the US grip on the global oil markets and therefore the international economic order.

Economic cost for the World:

While in the shorter term, these strategies may seem plausible particularly with the war industry been an important part of the US economic apparatus, the implications need to be analyzed carefully.

The constant rise of Islamophobia is pushing Muslim youth towards radicalization with questions seeking answers as to why the disputes involving Muslims are not resolved be it Kashmir, Palestine, Burma, Kosovo, e.t.c. but the likes of East Taimur or South Sudan with Muslims on the wrong side are promptly settled.

Similarly while Muslims came whole-heartedly to condemn the inhumane attacks in France they were also right to question whether the blood of Muslims is worthless as the daily deaths of thousands of them across the globe in Palestine, Kashmir, Burma, Afghanistan, Iraq, Syria, Libya, e.t.c. never derived the kind of solidarity the Paris attacks did.

In crux, these rising tensions can lead to a scenario where the sense of disillusionments, hatred, bias and injustice can play into the hands of global strategic interest and lead the world towards world war III. Such a situation will be disastrous for the global economy with very high human costs.

Islamophobia, a net loss game:

Global powers need to understand that hatred breeds hatred and the divisions being caused by Islamophobia will become entrenched in our psychology just like the crusades’ impact which still lasts to date. Just like crusades ended up wasting valuable resources on warfare and slowing down the global GDP growth, the present day’s interlinked economies will be hampered by the impact of wars.

Islamophobia ISLAMOPHILIA.png

While in the past a few nations have reaped the fruits of the misery of others, the present scenario is building towards a situation where that may not be the case and the world as a whole may witness the destruction of a third global war. This can end up being disastrous not just for rest of the world but the USA’s own economic prowess. Avoiding this may be the best course of action for us all, collectively as one species.

The author is Director of the think-tank “Millat Thinkers’ Forum” and a regular contributor in various national English language dailies. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and certified Anti-Money Laundering Expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or ozmeer@mlcc.pk

Online Version of Blue Chip without images

 

 

 

PIA: Striving for past Glory – Blue Chip Oct 2015 Edition

The following is the original draft of the article published in the renowned “Blue Chip” journal as an exclusive Op-Ed on Aviation in its October 2015 Edition

Online Version Link (Blue Chip)

PIA: Striving for past Glory

Prof Dp

By: Omer Zaheer Meer

Preamble:

It was the one of the top airlines of the world. It was also the first airline throughout Asia to operate a Boeing 737 as well as the first Asian airline to induct a jet plane in an era still stranger to them. Development, expansion and growth were not only the key goals of management but the vision driving forward a young airline of a new country on a global stage.

Yes, we’re talking about our very own Pakistan International Airline (PIA). Founded a year before Pakistan’s birth in 1946 on the direct orders of Quaid-e-Azam Muhammad Ali Jinnah to a leading industrialist M.A. Ispahani. Quaid’s strategic vision and foresight had him realize that with the formation of the two wings of Pakistan, separated by 1100 miles with enemy territory in between, a swift and efficient mode of air-transport was critical for the upcoming nation. The airline formed was named Orient Airways Ltd and was merged in the national flag-carrier PIA after its’ creation in 1955. Orient Airways has not only established a fleet of thirteen (13) aircrafts for air-transportation but also built a crucial setup of overhaul and maintenance facilities, trained pilots, engineers and technicians,. All this proved to be a great asset for PIA during its infancy phase. However the glory PIA achieved from such humble beginnings were hard to envision at that time.

Past Glory:

Under the likes of Air Commodore Nur Khan and Air Vice Marshal, Asghar Khan PIA not only grew regionally but implanting its’ signatures on a global level. Opening up of new routes, taking bold yet successful initiatives and delivering a top-class customer experience turned PIA into a truly great service to fly with. It was a success story of a newly born nation achieving many firsts, creating historic records (some of which are still unbroken to this date) and helping other countries build their national carriers. Some proud achievements from those golden years are as below:

  • In 1962 PIA set the record for the fastest flight between London and Karachi by completing the flight in just 6 hours, 43 minutes, 51 seconds, it is a record which still remains unbeaten to this day even after 53 years.
  • On 29th April, 1964 PIA became the first airline from a non-communist country to fly into the People’s Republic of China. PIA’s Boeing 720B flew from Karachi to Shanghai via Canton.
  • In 1960’s PIA continued to expand its fleet further with the addition of Boeings, Fokker and other top airplanes.
  • During both the 1965 and 1971 Indo-Pak wars, PIA played a major role in providing logistical support to the Armed Forces by operating special flights airlifting soldiers and ammunition. With these contributions, the prediction of Quaid e Azam came true in that the Pakistan Air-force (and defense) needed the support of a civil airline in special circumstances, and this was evident during these wars.
  • Such was the charisma and lead of a confident national carrier at this time that PIA hired the renowned French designer, Pierre Cardin to design new air-hostesses’ uniform which was another first and trend-setter in the aviation industry, immediately imprinting PIA’s brand as one of the aviation leaders on world stage.
  • PIA became a household name in Pakistan in the sixties.
  • During 1970’s PIA reached a level where it started providing technical as well as administrative assistance and/or leased aircrafts to foreign airlines including Somali Airlines, Philippine Airlines, Air Malta and Yemenia.
  • Through one of its’ subsidiary, PIA also started providing hotel management services in United Arab Emirates towards the end of the 1970’s.
  • During the 1980’s PIA continued its’ journey towards excellence and helped establish Emirates’ Airline by leasing two of its airplanes, Airbus A300 and Boeing 737 (737-300), as well as by providing technical and administrative assistance to the carrier.

It was during the 1990’s when private airlines were allowed to operate within Pakistan that PIA faced domestic competitive pressures. However with bold and creative measures including “air safaris”, adding new destinations, starting non-stop flights to key destinations, not only did PIA successfully faced off the competition but continued to register profits after a slump. However despite some achievements like being the first Asian airline to touchdown in Oslo, Norway, the second half of the 1990’s saw PIA nose-diving.

Intriguing Queries:

This all should lead us to questions worth pondering such as:

  • Where does PIA stand now?
  • What exactly did go wrong?
  • How did a national carrier that did so brilliantly despite strong odds fell so low when the going got easy compared to the challenges of its’ early days?
  • What’s being done to revive the ailing flag-carrier that once stood for national pride and identity?
  • What, if anything can be done to reverse its’ fortunes and itself to its’ past glory?

The Present:

At present, PIA is owned by the Government of Pakistan which holds 87% while private shareholders already own 13% of the national flag-carrier. The Pakistan Muslim League–Nawaz government that took over in May, 2013, created an Aviation Division to look after the affairs of PIA, the Civil Aviation Association and the Airport Security Force, all under the defence ministry until then.

As for PIA’s own corporate management, it entails a Chairman, Managing Director (MD) and a Board of Directors. The Board includes nine independent members amongst its ranks to ensure independence and has several sub-committees including an Audit Committee, Brand and Advertising Committee, Finance Committee, and Human Resource Committee. The MD leads the executive management of staff who run the airline. As you must already be aware, PIA’s headquarters are located at Karachi Airport with smaller offices located in several cities across Pakistan.

Despite all odds, PIA is still the largest airline of the country with a fleet comprising of 35 aircrafts some of which are not serviceable. The fleet includes thirteen (13) Airbus 320s and five (5) ATRs leased over the past year. Moreover, four (4) additional A320s and two (2) Boeing 777s are expected to join later this year.

Despite improvements over the past year, the service standards deterioration over the years with a reputation of late flights, unfriendly airhostess and rude support staff topped up with undesirable food has built a negative impression of PIA over the past decade

Root Cause(s) of the downfall:

The political hiring and nepotism during the 90’s brought the airline down from the high standards it had placed itself on. The interference reached a level where currently, despite some positive steps recently, PIA has the highest employees to aircraft ratio in the world of 690 compared to a global average of approximately 150 employees per aircraft. This should lay bare the extent of the problem. Moreover most of these hirings in the past had nothing to do with merit and as such caused unnecessary burden on the ailing airline. This all was happening against the backdrop of increasing competition along-with end of PIA’s monopoly over local market due to the Government’s open skies policy and allowing of private airliners.

The Impact:

In addition to the financial pressures, these unnecessary hirings against merit resulted in a serious slump in the service standards. Food became stale, cabin crew unpleasant and support staff unhelpful. To make matters worse a culture of being late was accepted as a norm which is perhaps the worst that can be done in air travel which often is time-constrained anyway.

Unionism went on rise within PIA with powerful unions of pilots as well as other workers. Incidents of smuggling rose as a result of the pressures from these unions placing favored crew on international flights, hiring based on fake degrees rose, the lack of competencies and slackness resulted in maintenance standards falling resulting in fines and bans on PIA flights intro certain developed countries, employees started side businesses as contractors and/or suppliers with cover providing sub-standard items to the national carrier. Nepotism and strong union culture along with a focus on corruption resulted in the practices going unpunished.

The result was a not so surprising down-fall in business and a tarnished reputation resulting in massive losses that seemed to continue accumulating with an upward trend for years on the trot.

Remedial actions undertaken for revival:

While it is very easy and a national trend to criticize public institutions, it takes vision and courage to see deep and state the truth perhaps even against the widely held false beliefs. That is precisely what we’ll be doing in this section of this write-up.

Over the past one and a half year, the PIA management has taken various steps to address the problems plaguing it with the aims of upgrading service standards and boosting employee morale.

The most critical issue of unnecessary non-competent staff and corruption has been addressed. Earlier this year, in an unprecedented move, three hundred and eight (308) fake degree holder employees were terminated from service after a move of credential verification of around sixteen thousands (16,000) employees was initiated in line with the apex courts’ decision.

Similarly to address quality issues and corruption allegations all aircrafts’ parts procurements is now been made from original equipment manufacturers, closing the doors for middle men and agents.

Also a focus has been made on competent employees with a through process initiated to hire top-qualified and experienced professionals who can think out of box to assist in the revival attempts for the national carrier.

Moreover as mentioned above modern fuel-efficient planes have been leased into the airline fleet while more are in process to join the airline addressing the critical employees to aircraft ratio as well as the high fuel costs. The four (4) additional A320s and two (2) Boeing 777s are expected to join later this year have the potential further strengthen PIA while generating additional revenues. These result in serious reductions in fuel and engineering costs.

Under previous administrations some aircrafts were planned to be leased under “wet lease” which is short-term and includes the complete crew, maintenance and insurance from the lessor too. This was astonishing considering that PIA is already heavily over-staffed regarding crew, maintenance and flight support services. However the current administration has leased and plans to lease future aircrafts under longer-term “dry leases” which addresses this serious issue of additional constraints negating one of the prime purposes of expanding the fleet.

The top management is leading by example with unprecedented moves like Chairman PIA Mr. Nasser N.S. Jaffer travelling in ordinary flights taking the last seats and personally visiting airports to first hand observe the delivery standards and seek passenger inputs.

The punctuality issue and improvements in in-flight service is also been addressed and not only witnessed first-hand by this writer but shared by many frequent flyers. The flight schedule integrity (operating the flights on scheduled time) has improved to high nineties (though finance minister recently appreciated the 88% on time flights of PIA) while seat factor (seat occupancy) is now in high seventies as per official claims of PIA, which are indeed marked improvements. Similarly the critical Haj operation is underway and PIA claims punctuality of 96% so far which is largely in line with its past gold standards.

The Change Agent:

An apt saying often quoted is that it is the man behind the machine who matters. Similarly the men at the helm of affairs in large institutions like PIA can make or break them. We do not need to borrow examples of this from other countries or even institutions as the PIA’s own history with the glory attained under the likes of PAF big names Noor Khan and Asghar Khan as well as the shambles under the reign of some not so competent heads is a testimony to the same.

In was in this context that Mr. Shujaat Azeem was appointed as a Special Advisor to PM (SAPM) on Aviation. Due to some legal technicalities there were issues on his initial appointment which were sorted out in an amicable manner. Not many people outside the aviation industry know about the uniquely technically sound, experienced, gifted, business minded, astute and visionary person that Mr. Azeem is.

His career spans decades and is multi-dimensional. Not only has he been a fighter pilot for twelve (12) years and later became a commercial pilot serving as the chief pilot of ex-Lebanese PM Mr. Rafique Hariri’s fleet, the size of an airline, he also has vast experience of aviation related businesses. He successfully ran airline handling business in Canada while a successful business focusing on terminal services, cargo/ramp/ATC operations handling other than ticketing with clients such as Saudi Airline, Etihad Air, Gulf Air, Qatar Air was run in Pakistan. In line with the best corporate practices and ethical standards, he resigned from all family business when appointed to serve the national carrier.

He has brought with him the vast experience of not only the flight but the technical aspects, topped up with an astute corporate understanding. This has enabled him to have a tact-fully put in action a plan based on his solid understanding and vision to turnaround PIA. In order to execute his vision, meritorious placements at the top level in PIA have resulted in many positive things happening in the national flag carrier.

The appointment of Mr. Nasser N.S. Jaffer as Chairman PIA on Mr. Azeem’s recommendation was one such step and critical. Not only is Mr. Jaffer a successful businessman with a proven track record but has already won over many friends and fans with his hands-on approach focusing on revamping the dwindling standards of PIA.

So when an institution as much in slump as PIA has to be revived, top guns must be got on board. Although we often criticize incumbent Governments and in many cases rightly so, perhaps we should also be honest enough to give credit where it’s due. The placement of Mr. Azeem seems to be one such instance of good execution of discretionary authority which is bearing bruits for the barren lands of PIA.

To privatize or to not:

In September, 2013 the incumbent government decided in principle to partially privatize the national carrier, selling approximately 26 per cent of its shares, and to privatize its management. While the proponents point towards the past dismal performance, the opponents of the proposals also have a strong case to plead.

  • Firstly the track record of privatization has been dismal in Pakistan with a lack of regulation and investor interest.
  • The privatization of recent past has resulted in surplus institutions posting losses, Government been forced to pump funds to ensure provision of vital services, outstanding sums of investments on controversial pretexts and a deteriorating level of services.
  • In a particular case, a disaster of sorts, a public owned enterprise of an Arab country has been given the control of a public owned institution in Pakistan, citing that public owned institutions cannot be run efficiently. The irony is unmistakable.
  • Furthermore, no investor will come forward for or offer a good price for an airline in the state that PIA had been.
  • With an injection of capital and a ban on unions, PIA did become profitable in early 2000’s. There is no reason why this cannot be achieved again.
  • Things have started to improve with initiatives moving in the right direction as outlined above.

The solution to PIA’s woes lies in resolving the issues facing it with initiatives such restructuring, inducting new aircrafts, needs based hiring of competent professionals, improving service standards and punctuality along-with a brand makeover rather than privatizing particularly in light with the past experiences resulting in even worse situations for some national institutions that had been privatized.

PIA has proven that it can be successful and the initiatives by the current management including particularly the leasing of fuel-efficient modern aircrafts and improving service standards have the potential to revive it. The impact of the initiatives has translated in financial results as PIA’s operational loss of under Rs1 billion in the six-month period to 30th June 2015 is actually more than half of the loss it incurred the same period of the last year. Keeping in view of this, the current PIA team should be given a chance and time to prove their abilities in taking it to newer heights

Proposals to regain past glory:

The problems with PIA have been more due to past political interference and manageable. Some crucial issues and the proposals to resolve them are presented below:

Key Issues:

  • Aging fleet with average age of seventeen (17) years
  • Political interference
  • Perception of low service standards and non-punctuality
  • Exorbitant employees to aircraft ratio
  • High debt servicing costs

Proposed Solutions:

  • Dry leasing of additional modern, fuel-efficient aircrafts which will not only increase revenues but also cut down costs
  • Improving service standards particularly the hospitality and punctuality aspects
  • Continuing the process of weeding out the incompetent employees
  • Boosting morale of the other genuine and competent workers by merit based promotions and future hirings of competent professionals with a global outlook
  • Focusing on additional regional routes and capturing larger share of international routes
  • Shift most if not all of PIA’s debts to ideally a cash rich government institution in return for transfer/co-ownership of its’ renowned hotels including Roosevelt Hotel which alone is estimated to be worth around $ 1 billion
  • An alternate could be to create a separate entity with the above mentioned assets and liabilities transferred to it, giving PIA a thinner, focused look and resolving the issue of costly debt servicing
  • Amending the rules of PIAC prohibiting political interference

These core reforms proposed above, if properly implemented with a focus to rely on and develop indigenous capabilities, can resolve the current enigma facing the PIA. With the above actually implemented, there is no reason, why PIA cannot stand on its own feet and becoming a leading airline not just in the region but the whole world, attaining its’ past glory once again. Let us hope that our representatives in parliament give this all a serious thought while considering the future of PIA.

NB: More detailed procedures and sub-proposals regarding the above can be shared with key officials and those interested.

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

Privatization & Restructuring Institution

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

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

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

Privatization & Restructuring Institution

Prof Dp

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

Resolving the Banking Transactions’ Tax Crisis

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

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

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

Resolving the Banking Transactions’ Tax Crisis

Prof Dp

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