Immovable Property Gambit: Impact on Stakeholders

The above titled article was published in the renowned Blue Chip Journal as an Op-Ed in it’s Oct – Dec 2016 edition.

Link to e-edition of the (Blue Chip) publication

Immovable Property Gambit: Impact on Stakeholders

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By: Omer Zaheer Meer

The recent developments in the Federal Budget and later on in the Finance Act 2016 regarding immovable property shook the realty sector within Pakistan which was taken by surprise. Taxation is not just a mean to fund a Government but also a policy tool to impact the national economy, social behaviors, trends and developing institutions. Unfortunately, in Pakistan the impetus has mostly been on using taxation for filling up the coffers of treasury with seriously negative consequences.

Before proceeding with our topic, this writer will briefly define some of the vital concepts and then move onto the core issue; cover the current taxation regime for the realty sector particularly as governed by the Federal Government before concluding with an analysis of the major impact on key stakeholders including investors, property dealers, general public, traders and the Government.

Key Concepts:

Following are some of the vital concepts which are important to understanding the topic of this write-up:

  • Income Tax – a tax levied on the income of an individual or organization which varies with the level of income and is subject to local laws and regulations.
  • Capital Gains Tax – a tax levied on the gains accumulated on the sale/disposal of capital assets subject to certain conditions
  • Capital Gains – a gain arising on the disposal of a capital asset by a person in a tax year.
  • Depreciable Asset –means any tangible movable property, immovable property (other than unimproved land), or structural improvement to immovable property, owned by a person that —
  • has a normal useful life exceeding one year;
  • is likely to lose value as a result of normal wear and tear, or obsolescence; and
  • is used wholly or partly by the person in deriving income from business chargeable to tax,
  • Filer – a person who has filed his income tax return irrespective of the income and/or tax declared.
  • Non Filer – a person who is not a filer.
  • Capital Assets: – Section 37(5) of Income Tax Ordinance 2001 states:

 “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include —

  • any stock-in-trade [ ], consumable stores or raw materials held for the purpose of business;]
  • property with respect to which the person is entitled to a depreciation deduction under section 22 or amortisation deduction under section 24; [or]
  • any movable property [excluding capital assets specified in sub-section (5) of section 38] held for personal use by the person or any member of the person’s family dependent on the person[.]

Tax Avoidance Culture:

Unfortunately there is a widespread tax-avoidance culture in Pakistan with people not seeing value or duty in paying due taxes. To put things in perspective, out of a population of 200 million, just over a million taxpayers file returns in Pakistan which comes up to about 0.5% of the population. Even out of this, a large number files Nil tax returns.

Salaried individuals end up paying their due taxes, not by choice but as a result of being bound by the law requiring their employers to deduct the due income tax on their salary in advance.

On the other hand, the rich and powerful segments are either exempt by law (large landowners) or pay miserly taxes as compared to their lifestyles and incomes. This includes influential people from almost all segments of society be it politicians, bureaucrats, journalists, generals, professional or others. This leads to a culture where tax is seen as an unnecessary and avoidable burden instead of a duty and cost of living/doing business.

Reasons for the Prevailing Culture:

There are many reasons for this unfortunate prevailing trend. The key ones are listed below:

  • lack of trust in Government
  • lack of public facilities
  • lack of quality health, education and law and order facilities
  • corruption of Government officials
  • harassment by taxation officials
  • structural issues within the taxation system
  • regressive taxation policies
  • high incidence of taxes on a very low tax base
  • no or minimum tax paying culture by the rich and the powerful
  • culture of law violation
  • perception that it is better and easier to remain outside the documented economy

 

Filer and Non-Filer Differentiation:

To address some of the above issues and in order to entice masses to become part of the documented economy, the FBR and thereby the Government came up with a productive and results-oriented strategy. For the past two years, there’s been a growing policy of differential tax rates for filers and non-filers.

This introduces an incentive for the people to start filing their income tax returns. Moreover, as even a nil return (where no income is reported and/or no tax is due) serves the purpose, this further increases the incentive.

However, due to the issues listed above, a majority of the people believe it to be better to avoid filing returns and becoming part of the system, more so for the fear of harassment by tax officials. So, as outlined many times before, unless structural reforms are carried out within the taxation system, such measures will not achieve the full results they’re aimed at.

The Issue:

Despite the presence of the concept of Fair Market Value in the taxation laws, for too long immovable property has been valued in Pakistan at the rates commonly referred to as the “DC Rates”. These rates are heavily undervalued. For example a property in DHA Lahore maybe selling for PKR 25,000,000 but the DC rates would be around PKR 6,000,000.

As a result of this, the capital gains taxes were either avoided or paid on extremely low values at low rates. This led to the creation of an attractive opportunity for undocumented, untaxed and black money to be “parked” in the realty sector which led to large-scale trading of properties rather than actually building houses and property units despite a serious shortage of over 9 million housing units as per State Bank of Pakistan presenting a huge business opportunity. Although local investors and families did construct housing units but the bulk of the investment went to mere trading to drive up property prices and create non-sustainable profits for the investors.

The size of the black money involved is conservatively estimated at PKR 6 to 7 trillion. Unsurprisingly, due to heavy investments in realty sector, property prices for the past many years sky-rocketed, growing at astronomical but non-sustainable rates, lacking economic fundamentals. This, coupled with the “tax-efficient” black money parking, created a very alluring and largely undocumented investment opportunity as people even started trading “files” without transferring properties in their names to avoid the taxes altogether.

The Initiative:

In view of the issues and strategies discussed above, this year the Federal Government on behest of the FBR decided to move a step further, this time targeting the real estate sector.

Furthermore, with the idea of a massive increase in tax revenues, possibility of bringing part of the seven trillion Rupees wealth within the documented economy and most importantly the pressure for international lenders providing the necessary motivation, the Government decided to take an initiative.

The Finance Act 2016 made an amendment in the Income Tax Ordinance 2001 by introducing the concept of Fair Market Valuation of immovable property by a panel of valuers notified by State Bank of Pakistan, one of the stronger regulators in Pakistan, as taxable value.

Moreover the requisite holding period for Capital Gains Tax exemption was increased from 2 to 5 years and higher rates of Capital Gains Tax were introduced.

Outcry:

This caused severe panic and fear amongst investors, property traders and dealers. Most important for them was the message and the manner in which the new taxation policy was decided without taking them on board. They feared that the intense focus on realty sector would lead to them being asked about their existing wealth and past transactions and consequently they anticipated heavy penalties and tax liabilities on account of the past transactions.

The key issues which made the realty sector anxious were as below:

  • higher taxation
  • hassle and harassment by FBR
  • a valid concern that the valuation by SBP’s valuers would be highly subjective and non-standardized.
  • Section 111 of the Income Tax Ordinance 2001 regarding unexplained income and assets may be invoked regarding past transactions.

This resulted in almost a suspension of property trading and protest preparations across the country.

Capital Flight:

As one would expect, the situation resulted in a capital flight. Besides other destinations, most of the capital flight was destined towards UAE by some of the investors. To put things in perspective, as per Dubai Land Department, Dubai had already seen Pakistanis investing US $ 4.9 billion in last 2.5 years. Now with this increase flight and market panic, the Government feared a melt-down not previously taken into account properly.

Negotiations:

This led to the Government initiating a series of negotiations aiming at reaching a middle ground with the key stakeholders as the consequences seemed to be more than those predicted by the decision makers.

After a series of repeated rounds of negotiations, a compromise was reached between the Government and the key stakeholders, which was implemented by way of an Ordinance.

Settlement:

The compromise reached resulted in the current position which is as below:

  • FBR in consultation with the representatives of various organizations from the realty sector has agreed valuation for major towns. These valuations are above the DC rates but still much below the current market valuations.
  • These FBR valuations will be used as a basis for taxation of immovable property. Where these are not available, the DC rates will continue to be used. FBR will revise these rates from time to time.
  • The holding period for exemption from CGT is reduced from 5 to 3 years with the CGT charged at different rates in three slabs for each of the holding period.
  • A differential treatment has been introduced for immovable property acquired before or on and/or after 1st July 2016.
  • Exemptions from CGT and Advance Income Tax on immovable property, for families of Shahuda and Government officers have been introduced.

Compromise on Fair Market Valuation:

The amendment to introduce State Bank of Pakistan’s approved valuators has been amended in favor of valuations issued by FBR in consultations with key stakeholders and giving FBR the powers to revise these rates in future too.

FBR issued 22 SROs covering valuations for residential and commercial properties in Karachi, Lahore, Islamabad, Gujrat, Jhang, Bahawalpur, Sahiwal, Hyderabad, Jhelum, Rawalpindi, Multan, Sukkur, Quetta, Abbottabad, Peshawar, Sialkot, Mardan, Gujranwala, Sargodha, Gwadar and Faisalabad effective from 31st July 2016.

These have been divided into 3 categories:

  • Residential (including flats)
  • Commercial Area
  • Industrial Area

4 measuring parameters have been used for different areas based on per:

  • Acres
  • Marlas
  • Square Yards
  • Square Feet

Compromise on Holding Period:

The holding period required for exemption from Capital Gains Tax has been reduced from the proposed five (5) years to three (3) years.

Compromise on CGT Rates:

The new table of Capital Gains Tax rates is as below:

Exemptions and Reductions:

For immovable property allotted to the following persons, the CGT would be 0% irrespective of the holding period:

  • A seller, if the seller is dependent of:

(i) a Shaheed belonging to Pakistan Armed Forces; or

(ii) a person who dies while in the service of the Pakistan Armed Forces      or the Federal and Provincial Governments; and

(b) to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.”

Moreover, Capital Gain Tax have been reduced by 50% in case of first sale of immovable property acquired or allotted to ex-servicemen and serving personnel of Armed Forces, Federal and Provincial Governments, being original allottee of the property and duly certified by the allotment authority.

Calculating CGT:

Gain arising on the disposal of immovable property by a person in a tax year (none after holding for three years), shall be chargeable to tax in that year under the head Capital Gains at the rates specified in Division VIII of Part I of the First Schedule.]

The gain (and thereby the CGT) arising on the disposal of a capital  asset by a person shall be computed in accordance with the following formula, namely:–

(A – B) x T, where

A         is the fair market value as determined under sub-sections (4) or (5) of Section 68 of INCOME TAX ORDINANCE 2001; and

B         is the cost of the asset.

T         is the applicable CGT rate

For the purposes of determining component B (the cost of the asset) of the formula amount shall be included in the cost of a capital asset for any expenditure incurred by a person –

  • that is or may be deducted under another provision of Income Tax Ordinance 2001; or
  • that is referred to in section 21 (Deductions not allowed).

NB: Any selling expenditures and ancillary costs of acquisitions are included in B.

Current Immovable Property Taxation Regime:

Currently both federal and provincial governments have levied their taxes on the realty sector.

The federal taxes (impacted by the changes introduced) are as below:

  • Advance Income Tax (Adjustable) on Buyer (Section 236K of INCOME TAX ORDINANCE 2001)
  • Advance Income Tax (Adjustable) on Seller (Section 236C of INCOME TAX ORDINANCE 2001)
  • CGT (Section 37 & 38 of INCOME TAX ORDINANCE 2001)
  • Fair Market Value (Section 68 of INCOME TAX ORDINANCE 2001)
  • Unexplained Income or Assets (Section 111 of INCOME TAX ORDINANCE 2001)
  • Valuation of Assets (Rule 228 of Income Tax Rules 2002)

The provincial taxes (unaffected by the changes discussed) are as below:

  • CVT (Capital Value Tax)
  • Stamp Duty
  • Property Registration Fee
  • Transfer of Immovable Property Tax (TMA)

Federal vs Provincial Domains:

The matter of levying taxes on realty sector is controversial as post 18th Amendment Capital Gains Tax has effectively fallen in the Provincial domain whereas trading income remains in the Federal domain. However, FBR is of the view that this is well within their domains.

The matter is currently in litigation and decision of the honorable courts will have a serious impact on the future outlook.

Out of Sight Real Issue:

More important than CGT rates or holding period is the classification of income earned from the realty sector. Investors frequently trading properties may find themselves in a tougher spot re taxation as their gains will likely be classified as income from business which is taxed at much higher rates.

Therefore, the classification of the gains from realty should have been taken up as a more important priority than Capital Gains Taxes.

Clearing Misunderstandings:

  • While proceedings cannot be initiated under Section 122 of the Income Tax Ordinance 2001 as per decision of Honorable SCP (2009 PTD 1279), Commissioners Inland Revenue can ask to explain the source of any explained income or asset (investment made in immovable property) on the basis of other information (undisclosed bank account, property, e.t.c.)
  • Hence this section can be applied and is a major concern for those affected.
  • Opportunity to be heard and provide and explanation are given
  • So practically, section 111 of INCOME TAX ORDINANCE 2001 may still be invoked.

Valuations for the Purposes of Section 111 of ITO:

FBR’s valuation tables are to be used for the purposes of Section 111 (Unexplained Income or Assets) of Income Tax Ordinance 2001. Where not notified by FBR, the valuation of Immovable property for the purposes of Section 111 shall be as below:

in the case of open plot, the value determined by the development authority or government agency on the basis of the auction price in respect of similar plots in the area where the plot in question is situated or in case where such value is not determined, the value fixed by the District Officer Revenue or provincial authority authorized in this behalf for the purposes of stamp duty;

in the case of agricultural land, the value equal to the average sale price of the sales recorded in the revenue record of the estate in which the land is situated for the relevant period or time; or

in the case of constructed immovable property, value shall be determined at the fair market value as defined in section 68 or the value fixed by the District Officer (Revenue) whichever is higher.

Income Tax on Builders:

The taxes on builders and developers by FBR are different. A tax is levied on the profits and gains of a person deriving income from the business of construction and sale of residential, commercial or other buildings at the rates  specified  below (Division VIIIA of Part I of the First Schedule):

(A) Karachi, Lahore and Islamabad (B) Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad, Quetta (C) Urban Areas not specified in A and B
For commercial buildings
Rs. 210/ Sq Ft Rs. 210/ Sq Ft Rs. 210/ Sq Ft
For residential buildings
Area in Sq. ft Rate/ Sq. Ft Area in Sq. Ft Rate/ Sq. Ft Area in Sq. Ft Rate/ Sq. Ft
Up to750 Rs. 20 Up to750 Rs. 15 Up to 750 Rs. 10
751 to 1500 Rs. 40 751 to 1500 Rs. 35 751 to 1500 Rs. 25
1501 & more Rs. 70 1501 and more Rs. 55 1501 and more Rs. 35


Income Tax on Developers:

Similarly a fixed tax is levied on the profits and gains of a person deriving income from the business of development and sale of residential, commercial or other plots at the rates below (Division VIIIB of Part I of the First Schedule):

(A) Karachi, Lahore and Islamabad (B) Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad, Quetta (C) Urban Areas not specified in A and B
For commercial Plots
Rs. 210/ Sq Yd Rs. 210/ Sq Yd Rs. 210/ Sq Yd
For residential Plots
Area in Sq. Yd Rate/ Sq. Yd Area in sq. Yd Rate/ Sq. Yd Area in Sq. Yd Rate/ Sq. Yd
Up to 120 Rs. 20 Up to 120 Rs. 15 Up to 120 Rs. 10
121 to 200 Rs. 40 121 to 200 Rs. 35 121 to 200 Rs. 25
201 and more Rs. 70 201 and  more Rs. 55 201 and more Rs. 35


Common themes of Tax on Builders & Developers:

  • It shall be computed by applying the relevant rate of tax to the area of the residential, commercial or other plots for sale.
  • The above tables applies to projects undertaken for development and sale of residential, commercial or other plots initiated and approved after the 1st July, 2016.
  • The aim is to introduce an “incentive” to declare real value of immovable property as the taxes by builders and developers are “fixed” by area, though one can argue as to the attractiveness of this “incentive”.

Major impact on key stakeholders:

As a result of the measures introduced by the Federal Government discussed above, the realty market in Pakistan has become stagnant. There has been capital flight and some correction in prices in a few areas. Let us briefly analyze the impact upon each of the major stakeholder group identified in the beginning:

Investors:

The investors are the one hit hard if not the hardest. They’ve virtually stopped further investments into the realty sector and most are holding onto their existing investments, pursuing a wait and see policy in the hopes of an impending amnesty scheme, expected to ease off the fears and therefore the pressure on the real estate market.

Property Dealers:

The magnitude of the property deals and thereby the business, for property dealers fell significantly. There are still some needs based transactions but not at the levels prior to July 2016.

Moreover, as many property dealers were also acting as investors or partial investors, they’re also negatively impacted in that area too.

General Public:

The impact on general public is more complicated. There are those that were involved in the business of or held immovable properties and are negatively impacted by the current situation.

However, with a shortage of nine million housing units as per SBP and the bulk of realty investment going in trading rather than actual construction, further fuelling the price bubble of property beyond economically justifiable fundamentals, the current pressure on realty sector is viewed with a sense of relief.

The masses hope that if the trend continues, ultimately the trading investors will have to liquidate their investments and move away which can lead to a down-ward correction in the property prices. Furthermore, hopefully atleast part of the investment may end up in the actual construction sector addressing the severe shortage of housing units in the country.

Traders/Businesses:

Ordinary traders are also impacted in more than one ways. Firstly the drop in realty sector’s attractiveness may open up more capital access for other business opportunities.

However, as there is a possibility of a snowball effect in the economy, if not properly managed the negative effects can spillover from the realty sector into other economic areas too.

Last but not the least, many of the traders are themselves invested in the realty sector too which makes them exposed to the same concerns as other investors.

Government:

The Federal Government is hoping to achieve several goals. They believe if there is a proper implementation, their initiatives can lead to the following:

  • down-ward adjustment in immovable property prices making them relatively affordable for masses
  • increased taxation revenue for the Government
  • investment diversion towards more “productive” segments such as construction and other businesses within the country due to the realty sector losing its’ previous attractions and the other sectors becoming more economically viable for investors

Proposal:

In order to achieve the desired purposes of an increase in the tax base and a better documented economy along-with a focus on actual construction of housing units rather than just mere trading of plots, the Federal Government should:

  • bring structural reforms within the taxation regime
  • do away with the overwhelmingly subjective powers of tax officials in favor of objective ones
  • follow volume over margin policy by introducing a single digit tax rate to minimize the cost of tax avoidance
  • introduce tax rebates and a tax-free period for the construction sector
  • address the fears of the stakeholders positively to bring them on board
  • run a campaign to educate masses about the importance of taxation backed by actions to tax the rich and the powerful

Another Amnesty:

There’s been news of another impending amnesty scheme doing rounds in the power corridors. The aim is to address the concern of the property investors re past transactions and unexplained income and assets. The basic structure of such a scheme is proposed to allow whitening of the past wealth by paying a meager single digit tax.

However, it may meet the same fate as the now infamous “Voluntary Tax Compliance Scheme” launched for traders earlier this year if it does not address the key concerns of the realty sector stakeholders. They are currently more in favor of the new law applying to future transactions and blanket amnesty re all past transactions without any cost to them.

How things pan out in the future will depend a lot on this scheme and how things shape up. Only time will tell if the boom in the realty sector is over or the powerful investors and stakeholders in this key sector of economy will be back with a bang!

The author is Managing Partner of Millennium Law & Corporate Company and 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 and can be reached at ozmeer@mlcc.pk

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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

 

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

Pakistan can’t afford turning CPEC into another Kalabagh Dam (Part I of II)

The following article has been published in Daily Nation, dated 18th May 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-05-18/page-9)

(Onlinehttp://nation.com.pk/business/18-May-2015/pakistan-can-t-afford-turning-cpec-into-another-kalabagh-dam)

China Pak Economic Corridor: way forward (Part I of II)

By: Omer Zaheer Meer

PART I

The biggest gift of nature to Pakistan besides all kinds of terrains and weather as well as hardworking young manpower is its strategic location. In this context the strategic significance of Gwadar adds to this dimension of Pakistan’s international importance. Gwadar is a strategically located area on the shores of the Arabian Sea just outside the Strait of Hormuz. It is situated near key shipping routes of global oil transportation with the surrounding areas having two-thirds of global oil reserves. Furthermore it is the closest warm-water port to landlocked Central Asian region and Afghanistan, both rich in untapped natural resources and economically undeveloped with huge potential. As if that was not enough, from a military standpoint, Gwadar is located at the eastern bay of the key passing which if blocked by a strong naval force, can cut off the oil supplies to any adversary with dire repercussions as any military expert will testify.

Before moving ahead on the core matter of China Pakistan Economic Corridor (CEC), let us briefly visit the history of Gwadar. Pakistan identified Gwadar as a site for its future port in 1954 when it was still under the rule of Oman. Government of Pakistan successfully negotiated with the Sultanate of Oman and purchased the enclave in the fall of 1958, ending a 200 year Omani rule of the small undeveloped fishing town. It wasn’t until 1977 that Gwadar was made a part of Balochistan by the Federal Government of Pakistan. Currently it has a population of approximately 85,000 people as per most studies.

Now moving onto CPEC, it is a mega project worth $ 45.6 billion, to connect Gwadar port with Northwestern China (Xinjiang) via Khunjrab (the last connecting point on the Pakistani side) along with development and uplift of transportation, energy and technical infrastructure in Pakistan. A network of road and rail links besides energy pipelines are envisaged.

There are three land routes planned to link Gwadar to Xinjiang in addition to a long-term “route adjustment link”. The three main routes are outlined below:

  1. The “original”, shortest and most popularized route passes through Quetta, Zhob, D.I.Khan and Peshawar. It is termed as the “western route” and is just over 2400 km long.
  2. The second route passes through Ratodero, Sukkuar and the Indus Highway.
  3. The third route which has stirred up the controversy actually passes through Sukkur and Karachi in Sindh and then via Lahore and Peshawar to connect with Khunjrab. This is termed as the “eastern route”.

All the routes are envisioned to be interconnected with industrial and commercial zones along the routes at key sites.

CPEC updatedFurthermore other major projects that are part of the CPEC are as below:

  •  320-kilometre-long Sukkur-Multan motorway
  • 120-kilometre-long Thakot to Hawalian road
  • upgradation of Karakoram Highway
  • 19-kilometre-long Gwadar port East Bay Expressway Project
  • development of Gwadar itself
  • building Gwadar airport
  • upgradation of Karachi – Peshawar “Main (Railway) Line”
  • commission of armed division (Economic Corridor Support Force) for security of CPEC
  • Havelian Dry Port
  • Orange Line Metro (Lahore)
  • Port Qasim 2x660MW Coal-fired Power Plant
  • 720MW Karot Hydropower Project
  • Zonergy 9×100 MW solar project (Quaid e Azam Solar Park) in Punjab
  • Jhimpir wind Power project
  • Thar Block II 2x330MW Coal Fired Power project
  • Hubco Coal-fired Power Plant Project
  • Gwadar-Nawabshah LNG Terminal and Pipeline Project
  • China-Pakistan joint cotton bio-tech laboratory
  • Cross-border fibre optic data communication system project, a digital terrestrial multimedia broadcast pilot project at Murree
  • Development of Private Hydro Power Projects, e.t.c.

As can be seen from the above non-exhaustive list, a lot of the projects are related to developing energy and technical infrastructure in Pakistan in addition to the transportation infrastructure projects. Infact more than 70% of the $ 45.6 billion is expected to be spent on these projects. However it is the transportation infrastructure that caught most attention due to its long term strategic significance, revenue generation and potential to be the game changer for the region.

to be continued next Monday  ……

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

Pak economy: curing cancer with anti-fever medicines?

The following article has been published in Daily Nation, dated 4th May 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-05-04/page-9)

(Onlinehttp://nation.com.pk/business/04-May-2015/pak-economy-curing-cancer-with-anti-fever-medicines)

Pak Economy: Curing Cancer with Anti-Fever Medicines?

 Prof Dp

By: Omer Zaheer Meer

Due to some personal engagements, a write-up dated 22nd March 2015 by Mr. Ejaz Wasti, a gentleman working for finance ministry, questioning my 16th March 2015 article published in The Nation, titled “IMF-Driven policies: Destroying Economy & inciting revolts?” missed my attention. Recently it was brought to my notice. The initial thought was to let it be but the lack of substance all but forced this scribe to pen this piece in the hopes that it may be taken not as a rebuttal but as constructive feedback aimed at helping the decision makers improve for the betterment of our beloved Pakistan. For, while we appreciate the positive endeavors of our policy makers as evident from the past articles of this writer, pointing out the shortcomings is also our moral obligation.

Unfortunately Mr. Wasti ignored important questions raised in the original article of 16th March and instead focused on inking a column seemed to have been compiled in a rush. What’s more tragic is that just days afterwards the denial penned by the gentleman, World Bank as well as Asian Development Bank issued damning reports vindicating this writers’ perspective while blowing off the lid of the misconstrued arguments of the finance ministry employee/consultant. It’d therefore be surprising to see how any neutral economist could possibly justify the worst growth rate in the region even below the likes of Afghanistan and Bhutan as outlined by the above mentioned reports?

It’s tragic that the stats often shared by certain quarters of the ministry reminds us of Mr. Shaukat Aziz who pursued similar gimmicks, building an economy on a bubble rather than on solid foundations of increasing GNP and GDP by focusing on national output. Remember, Shaukat’s bubble got busted not long after the end of his Government. This time around we don’t want a similar “feat” from a Government famous for its economic achievements.

Coming back to the 16th March write-up, some of the major questions were left unanswered including the fact that why the whole 500 billion payment to IPPs was made in one go without ensuring the availability of the loudly trumpeted “40%” unused capacity? Why the payment of this huge sum was not done in installments with ensuring availability of additional capacity in the national power system at the release of each tranche, particularly considering Pakistan went to IMF for a $ 6.7 billion installment based bailout package, 75% of which was paid to IPPs?

Furthermore, I humbly dare to question why has the circular debt again reached Rs. 600 billion, surpassing the previous level? Would it not have been better to focus on structural reforms and cutting the line losses as proposed earlier by this writer instead of treating it as a matter of wounded ego?

Furthermore as to the claims of adding 1700 MW “additional” capacity in the system by “IPPs”, can Wasti provide any evidence to this since it has not even been claimed by the IPPs or even the finance ministry represented by him. Having said that, the claims of forensic audits and verification by Ministry of the huge payments are commendable and should be released to the public, but the question of bypassing AG office was still left unanswered.

Next the scribe from finance ministry referred to income tax notices issued with the aim to broaden the tax base. Perhaps he should spare some time to check the ground realities. Never mind, let us try to assist our decision makers here.

Recently notices claiming no existing tax registration based on “economic activities”, usually citing vehicle purchases were sent out to masses. Sounds good? 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. Missing out on the records already held by FBR simply reinforces the misconceptions that Government policies are to bother the already registered tax payers and not to act as a facilitator or initiator of genuine drives to catch tax evaders. Instead of helping the underlying objective, the manner in which this drive is performed is actually pushing genuine tax payers on the brink of undesirable actions.

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 achieve a larger tax base such as brining agricultural income within the tax net as well as allowing use of CNIC as National Tax Numbers (NTN) and Sales Tax Registration Numbers (STRN) have been falling on deaf years for almost a decade now. Of late, there has been news that CNIC may finally be allowed as NTN. If done, this will be a step in the right direction.

Similarly the question about the petrol crises was also conveniently ignored. While repeating the point outlined by this writer that the incumbent Government did pass on some of the benefit of reduction in Oil prices in international market owning to political pressures, he again preferred to ignore the question of how much? As per last available data, Government of Pakistan amassed a benefit of $ 2 billion by the price reduction and as per most mainstream studies (as the government has not shared the exact data), not more than a quarter of this was passed on to the people of Pakistan. Perhaps the finance ministry can share exact data about this to enlighten us all in this regard.

To sum it up, let’s examine an extract from my original 16th March article: “While we can give some space to government’s economic team citing the tough challenges they inherited and are facing, what is unfortunate though is that even the steps possible within the ambit of Finance Ministry are not taken ……. the painful but obvious fact remains that the necessary reforms required to revamp the tax system and structures are not been followed either. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more along-with higher indirect taxes imposed on the common citizen, both of which are disastrous in the long run. Had we actually taken the tough but necessary decision to broaden our tax base and executed proper financial management especially in the power circular debt payment we would not need to go to the IMF. The lack of these reforms has led to exorbitant borrowings, with the internal borrowings alone reaching the mark of a trillion.”

With this, let’s conclude by asking whether those officials representing the present Government will review the IMF driven economic policies and carryout the necessary reforms while providing relief to the ordinary citizens or will they continue to focus more on short-term cosmetic measures without any bearing to the economic condition of a common man? Perhaps even more important is the question whether these officials have the stomach to digest constructive criticism and engage positively to ensure beneficial proposals for the national economy?

Links to both articles are as below:

http://nation.com.pk/business/16-Mar-2015/imf-driven-policies-destroying-economy

http://nation.com.pk/business/22-Mar-2015/pak-economy-the-right-perspective

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, 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 omerzaheermeer@hotmail.co.uk

Incompetency Main Reason of Power, Petrol Crises

The following article has been published in Daily Nation, dated 2nd February 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-02/page-9 )

(Online: http://nation.com.pk/business/02-Feb-2015/incompetency-main-reason-of-power-petrol-crises )

Economic Mismanagement

Prof Dp

By: Omer Zaheer Meer

Economic prosperity is defining the place and clout of nations on global stage in the present world order. The issues of economy and terrorism have captured the national attention in Pakistan too. The need of the hour is to strengthen the economy of the country which in turn would translate in to the might for the state, enabling it to better deal with the menace of foreign-sponsored terrorism.

While there is no doubt that Pakistan’s economy has constantly faced serious challenges over the decades yet there is indeed much left to be desired in terms of the management of the existing resources and structural reforms. Whenever the economic woes of Pakistan are discussed, the rulers point out to the limited resources and the dismal state they inherited the economy in. Fair enough, more often than not, the point conceded here. But fact of the matter is what stops them from properly managing the pool of resources at their disposal as well as inducing the much needed reforms to address the structural inefficiencies?

Many recent crises including the power break-down and the petrol crisis were examples of the incompetence of the highest order by the officials and ministers concerned. By not taking action against the culprits baring few government servants, the incumbent government has strengthened the argument of its detractors about its lack of political will and a vision to guide Pakistan’s economy in the right direction.

Let’s begin with a brief dissection of the two recent crises with most impact. First is the petrol crisis which literally bought the life to a halt across Punjab. Students couldn’t for to educational institutions, patients were unable to reach hospitals, work became stagnant and the life froze. This was down to atleast three major issues. Firstly the dues owed to PSO by state institutions were unpaid despite repeated requests rendering PSO unable to bring in more supplies. Secondly the private companies did not keep the minimum reserves required and OGRA failed to ensure implementation of the law and regulations in this regard. Last but not the least when PSO’s reserves were nearing exhaustion, despite official letters the Government still failed to realize the gravity of the situation. There were ugly exchanges of allegations between the Finance and Petroleum ministers. There are also unconfirmed stories doing rounds that the whole fiasco was created to authorize payments of over Rs 225 billion without due process involving AG office and audits. However, even if one discounts them, all this sums up to the mismanagement and incompetency of the highest order.

As if this was not sufficient for the suffering of the masses and losses to an already ailing economy, an electricity breakdown across the country ensued resulting in blackout in over 80% of major cities. A senior minister from the incumbent Government blamed terrorist activity in Balochistan province but perhaps owing to a lack of co-ordination due to blackout a senior government official acknowledged a technical failure in the transmission systems. The lack of co-ordination was simply astounding. It is no secret that the electricity transmission system is in dire need of overhaul and up-gradation with a severely decayed state at present. Unfortunately the incumbent Government hasn’t been able to do much on this front either despite been in power for the 2nd year now.

These crises clearly imply that the cause for exacerbation of Pakistan’s economic woes rests with a lack of management. Add to this the issue of the pending structural reforms badly needed in the taxation system along-with the dismal state of the revenue collection and one can easily appreciate the serious improvement warranted in the management of the affairs. One prime cause for this dismal performance is the appointment of non-professional people at the help of affairs of key institutions and ministries. While politicians do run the governments in a democracy, they atleast ensure they have a professional team to assist them. Unfortunately for Pakistan, be it Democracy or Dictatorship, this has been lacking.

While understandably, Pakistan cannot generate resources at par with established first world economies overnight, we can at-least manage our meager resources in an efficient manner. Perhaps it is high-time that Prime Minister of Pakistan Mian Muhammad Nawaz Sharif needs to look inwards within his party and take corrective measures including appointment of professionals to assist if not run the crucial ministries. If not, than a dismal economic performance can only sustain for a short span with the help of foreign aid. Let this also be a lesson for other political parties to ensure they’ve systems, teams, professionals and processes in place to cope with the challenges facing the country, should they be assigned the duty to steer the nation.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow 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

Choose the best available option

The following article has been published in the Sunday Edition of Pakistan Today, dated 7th September 2014
(For online version: http://www.pakistantoday.com.pk/2014/09/06/featured/choose-the-best-available-option/ )

(For Published Version, Page 6:   http://issuu.com/abidoon/docs/dna_issue_40/7?e=3820687/9210255 )

Choose the best available option

Learn from history

Prof Dp

 By: Omer Zaheer Meer

The author is a Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, qualified 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

It was a harsh winter, like winters in Russia are. The mighty advancing army was not only unaccustomed but also ill-equipped to deal with the extremities of climate. The officer in charge contacted his commander in chief detailing the ground realities and proposing a retreat and re-assault in summer. The response was a firm no with orders to march on, citing that their forces had never retreated, defeating all the global forces till then. Soon, the same army was buried in the graveyard of history along-with the commander in chief and his empire.

This is not a fictional story but the real account of the turning point in the history of Adolf Hitler led Nazi Germany. This is not the only example, rather history is filled with such disastrous actions repeated by otherwise brilliant leaders. Refusing to realise ground reality and not saving one’s strength in adversities to fight back later often led to obliteration, as has been the law of nature.

Timing is crucial in politics. But the ongoing fiasco in Islamabad has been a comedy of errors, where political blunders were committed and key opportunities missed. For example, the whole crisis started with the Model Town tragedy for which there was no need or logical basis. Everything was under the government’s control with operation Zarb-e-Azb in place. Though certain PML-N sections claim there was a conspiracy in “police fire” and some firing from the Minhaj secretariat, the decision to send police force to “teach a lesson” to protestors was solely PML-N’s.

When angry protestors who clogged the streets of London were calling for trial and hanging of Tony Blair due to his invasion of Iraq, the British government did not fire, use tear gas or arrest them.

Similarly, there were many missed opportunities. The government denied some logical and basic demands despite making commitments. When the protestors led by Imran Khan were attacked by a mob led by the brother of sitting MPA of PML-N in the constituency of Khurram Dastagir – a powerful MNA deemed close to the PM – there was more bad blood. When the protestors landed with less than expected numbers due to various reasons in extreme weather conditions, key government ministers started mocking instead of showing goodwill by providing food and shelter to co-citizens and Mian Nawaz Sharif taking a delegation to meet Imran Khan at that time. Though some food was sent later on, the moment was missed, and it was returned.

As if that was not enough, brutal police action was used on protestors including women and children. The government’s claim that since protestors had gas masks and sticks, they were akin to dangerous terrorist’ makes one wonder about the state of mind of those in charge. Also an argument was constantly repeated that no one is allowed to protest with cranes, sticks and gas masks anywhere in the world and that prior permission for protests is always taken in the civilised world. Unfortunately even our ‘learned’ electronic media anchors failed to correct this false narrative.

There had been several protests in the west including UK, USA and France where protestors took to streets without any prior permission. The black rights’ movement is a famous part of American history while riots in cities of France including Paris are not too old, and who can forget the infamous million march in the streets of London that choked and effectively closed down the city. None of the above countries used containers to block their own cities or used deadly force to kill the protestors despite even serious havoc in the case of French protests. Yes the protestors are not expected to and should not have sticks or cranes but if we analyse honestly, what are they supposed to do in the face of brutal assaults by the state machinery and road-blocks using containers?

When angry protestors who clogged the streets of London were calling for trial and hanging of Tony Blair due to his invasion of Iraq, the British government did not fire, use tear gas or arrest them. Nor did they use containers to siege entire areas and their own cities. They let the protestors steam off and it ended peacefully. On the other hand when the French authorities used police force to try to quell protests, though avoiding live bullets or cranes for blockades, the protests turned violent and spiraled out of control. This should be a lesson for the government, to let protestors exercise their democratic right of protest instead of using fascist measures that turn protests violent.

When key organisers fail to provide even basic arrangements and when office-bearers could hardly pull out a 100th of the pledged numbers despite widespread support, Imran needs to re-evaluate his options.

Another unfortunate fact is that political divisions in Pakistan have reached the point where it’s believed there are only two views, ones’ own view and the wrong view. This needs to change. Opinion makers, analysts, anchors, leaders and even the general public needs to have an open heart and a receptive brain enabling them to listen and neutrally analyse facts.

The fact of the matter is that PAT never had a widespread following or legitimacy but PTI does command both. Unfortunately despite Imran Khan’s resilience, determination and honesty it has pushed itself in a situation where there are no truly winning options. In such a situation when most of the party is disenfranchised and internal issues warrant serious attention, when key organisers fail to provide even basic arrangements and when office-bearers could hardly pull out a 100th of the pledged numbers despite widespread support, Imran needs to re-evaluate his options.

At the time of writing this we’ve reached a political stalemate, with some positive indications from Shah Mehmood Quraishi’s eloquent address in the joint session of parliament. In the situation detailed above, and with a few dozen elected MNA’s, if Imran can ensure legislation inducing reforms and closing the loopholes in the system, get the election commission reformed and re-constituted with well-reputed and competent officials, and get an independent Supreme Court tribunal to investigate alleged rigging in 2013 elections, it’ll be a very good situation to be in for PTI under the circumstances and the only possible way out of the political impasse Pakistan finds itself in.

What PTI has achieved is unprecedented in Pakistan as thousands of people have braved extreme weather and continue to sit in for three weeks, sacrificing their jobs, family lives and personal comforts for the sake of a merit based system in Pakistan. Let’s hope all this was not for nothing.