Stakeholder consultations are widely regarded as critical to ensure that policy decisions taken by the Executive are not only appropriate to attaining a specific socio-economic objective where private/public stakeholders are active but are also appropriate in the larger context of ‘fairness’ to other sections of society.
It stands to reason that a manufacturer of a particular product (or a union of those engaged in the production of that particular product) or a farmer growing a particular crop (or all farmers engaged in producing that particular crop) would proactively seek government support especially if market imperfections prevail – be they due to flawed government input pricing policy or porous borders leading to large-scale smuggling that compromises their ability to operate in domestic and/or international markets. The support sought may be in the form of tax concessions, subsidies, support price, and/or government procurement policy/exports.
Database of industrial associations in Pakistan lists 92 such entities including those which exert considerable influence on the government due to their contribution to the gross national product (GNP) and/or total exports. The usual rationale provided to the government when seeking assistance, which has merit, is to cite major impediments a particular production subsector faces that includes inadequate infrastructure, higher tariffs relative to their competitors in neighbouring countries – countries with which we have large porous borders accounting for a thriving trade in smuggled goods, piling refund payments and a flawed tax structure.
Take the case of a Pakistani textile exporter grappling with electricity/fuel costs (major input) higher than those of his competitors in India and China. High energy tariffs in Pakistan are sourced to poor governance of the energy sector, higher transmission and distribution losses than allowed by the regulator, theft, and support of mega projects by the PML-N administration rather than taking a holistic approach envisaging first improving the transmission network followed by higher reliance on cost efficient generation plants and retiring the obsolete badly performing state-run generation companies. The International Journal of Project Management in its April 2017 issue, article titled “Corruption in public projects and mega projects: There is an elephant in the room!” by Locatelli, Mariani, Sainati and Greco maintains that: “Despite the relevance of corruption in project selection, planning and delivery, the project management literature pays little attention to this crucial phenomenon…..Corruption is particularly relevant for large and uncommon projects where the public sector acts as client/owner or even as the main contractor. Mega projects are “large unique projects” where public actors play a key role and are very likely to be affected by corruption. Corruption worsens both cost and time performance, and the benefits delivered.” The Sharif/Abbasi-led PML-N administrations maintained that mega projects are the most appropriate form of state-funded development activity while Imran Khan’s Pakistan Tehreek-e-Insaf maintains that these projects were a source of corruption.
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The PML-N administration dealt with complaints of high energy costs by the productive sectors by arbitrarily lowering the price of electricity. This too was a flawed decision that not only accounted for heavy subsidies to the sector under the guise of inter-tariff differential but also fuelled the circular debt which, in turn, accounts for the current extremely high exposure of the sector to borrowing from commercial banks with the interest payments due on these borrowings passed onto the consumers. In other words, a pyramid of mistakes account for the current state of the sector. To deal with this situation would be a challenge for the Khan administration because whatever decision is taken it would leave a subsection of the electricity sector dissatisfied.
In addition former Petroleum Minister Abbasi, later elevated to the position of Prime Minister, signed a 15-year binding Liquefied Natural Gas (LNG) agreement with Qatargas (with a disturbing minimum annual purchase clause) which would compromise any attempt to optimize existing generation capacity from less expensive fuels or to enable the limited transmission system to vacate any increase in electricity supply. The Petroleum Minister has announced that the LNG deal will be reviewed as it should be while disturbingly the Finance Minister Asad Umar is on record as having stated that all deals that were signed during the PML-N tenure would not be made public though all those that would be signed during the Khan administration would be made transparent.
The second legitimate complaint of the productive sectors is the rise in refunds which the Federal Board of Revenue (FBR) routinely withholds – currently around 250 billion rupees is withheld under this account as claimed by the exporters while the FBR gives a lower figure of 200 billion rupees. FBR’s objective: overstate its revenue collection. The productive sectors suffer major liquidity crisis due to withholding refunds compelling many to procure loans from the commercial banking sector which raises their input costs further making them uncompetitive in the external market as well as in the local market (as cheaper smuggled items begin to pervade the domestic market). If the Khan administration releases these refunds then the budget deficit, already at an unsustainable level, is going to rise further and may lead to tougher macroeconomic decisions whether the government seeks IMF support or not because either way it would have to mercilessly slash development expenditure. Again, a very tough decision for the Khan administration!
The third major impediment to output is the high cost of doing business given Pakistan’s ranking of 147 out of 190 countries. This includes tariffs as well as red-tapism that continues to plague the productive sectors notwithstanding the regurgitated solution by the PML-N leadership every time it forms the government in the centre: one window facility. The World Bank acknowledged that starting a business, registering property, protecting minority investors and trading across borders benefited from some mitigating policy measures however Pakistan’s ranking in accessing credit and enforcing contracts remained unchanged and the country’s performance in paying taxes actually declined.
And finally, revenue generation during the PML-N government took priority over and above other considerations, including reforming the tax structure and administration and GDP growth. Tax revenue increased during the past five years but the increase was attributable to (i) higher taxes levied on existing taxpayers and (ii) increasing reliance on withholding tax – a tax levied in the sales tax mode which is an indirect tax with a higher incidence on the poor relative to the rich. Thus the small number of income taxpayers had their tax cut at source as well as paid withholding tax as and when they procured the service/product on which it was levied. In contrast, non-filers opted to pay a higher rate of withholding tax but legally remained outside the income tax net and refused to file their returns. It would be difficult for the Khan administration to do away with withholding tax as it comprises a major component of deliberately mis-categorized direct tax collections. However, in the long-term there is a need to gradually phase out withholding tax in the sales tax mode and enhance the tax net.
The government needs to acknowledge that all stakeholders do not have the same overarching objective and this is particularly the case with respect to the private sector versus a cash strapped government, and flawed utility pricing policies necessitating actions that are likely to generate public as well as productive sector discontent. Granted that the government’s short term targets necessitated by the appalling state of the economy are likely to fuel discontent but at the same time the government must begin work and keep the public informed that these are short-term measures and a massive long-term overhaul of the tax structure as well as the energy sector are in the works. The good news is that the Prime Minister seems to be fully aware of the challenges and committed to reforms. One would hope that he is given the time that is required to make a difference.
(This news/article originally appeared in Business Recorder on September 10th, 2018)