Author Archives: Moin Fudda

Business Community Unites on Pakistan Budget Proposal

kcci presidents conference

“In a rare show of strength, top representatives of all the country’s chambers of commerce and industry gathered in Karachi and asked the government to revamp the tax collection system if it wants to increase revenue collection in the country.”Express Tribune

For the past five years, CIPE Pakistan has been supporting the All-Pakistan Chamber Presidents’ Conference organized by Rawalpindi Chamber of Commerce & Industry. This conference has provided the business community an opportunity to assemble and a platform to advocate for policy reforms in the country with one voice.

Following in the footsteps this conference, Pakistan’s largest chamber, the Karachi Chamber of Commerce & Industry, organized a Chamber Presidents’ Conference focusing on bringing together leading chambers to submit a joint proposal for the forthcoming federal budget.

Considering the fact that Pakistan has one of the lowest tax to GDP ratios, which results in the government falling short of revenue and burdening those who already pay heavy taxes, participants of this conference remained focused on a single-point agenda “to work with government on increasing tax collection and reducing dependence on IMF loans.”

Zubair Motiwala, Co-President of the Pakistan-Afghanistan Chamber of Commerce & Industry said, “Our successive governments have followed a policy of divide and rule. But now that we are united here on one platform, no government can ignore us anymore.”

The conference was attended by the presidents of more than 18 chambers including those from Faisalabad, Lahore, Multan, Islamabad, Rawalpindi, Khyber Pakhtunkhwa, Gilgit Baltistan, Lasbela, Sukkur, and other cities and regions.

This was the first time that leading chambers have agreed to develop a unified budget proposal at least two months ahead of budget preparation. The proposal will be finalized at the next meeting, which will be hosted by Faisalabad Chamber of Commerce & Industry in April of this year.

The business community showed its determination to keep advocating for policy reforms to encourage economic revival in the country. Speaking at the occasion, Dr. Shimail Daud, President of the Rawalpindi Chamber of Commerce and Industry, said;

“The unnecessary power of the bureaucracy should be curtailed for the good of the country’s economy. The business community from all four provinces of the country is working together for the most implementable and serious budget proposals and this time it will definitely bring results.”

Moin Fudda is Country Director for CIPE Pakistan.

Political Parties Ask Business Community to Present Economic Manifesto for Pakistan

President Conference 1

The Chambers President’s Conference provides an excellent opportunity for business community leaders to focus on a single key agenda point – how to advocate for business-friendly policy reforms – This is the only such event in Pakistan that brings business community leaders together under one roof for intense and constructive discussions.” – Manzar Khurshid Shaikh, President, Rawalpindi Chamber of Commerce & Industry

For the fifth year in a row, on February 25-26, 2013, leaders of Pakistan’s business community assembled at Bhurban near Islamabad to participate at the Fifth All Pakistan Chamber Presidents Conference. Thirty-three chamber presidents representing large and small chambers from across Pakistan deliberated on how the next government should act on improving conditions for doing business in Pakistan. The Rawalpindi Chamber of Commerce and Industry spearheads this event in collaboration with CIPE Pakistan.

This year’s conference was unique as, for the first time in this history of Pakistan, representatives from five key political parties faced direct questions from business leaders. Pakistan Peoples’ Party, Pakistan Muslim League (N), Pakistan Muslim League (Q), Muttehda Qaumi Movement (MQM) and Pakistan Tehreek-e-Insaf (PTI) attended the meeting. There was an agreement from politicians that the next government must improve the conditions for doing business in the country, which will not only stop capital flight, but also provide employment opportunities.

Interestingly, they arrived on a consensus on the business community’s demand for an effective business-focused manifesto. It was agreed that after the elections, key political players will again sit down with business community leaders to get feedback on specific reform agenda.

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Pakistan Inches Towards Reforming Public Sector Enterprises

Participants at the roundtable on corporate governance of public sector enterprises in Islamabad. (Photo: CIPE Staff)

“The government was determined to enhance the efficiency of public sector enterprises (PSEs) by restructuring their boards and appointing professional heads of these organizations, mostly from the private sector, in order to make the entities profitable institutions.”

– Dr. Abdul Hafeez Shaikh, Finance Minister of Pakistan

Pakistan’s loss-making public sector enterprises (PSEs), also known as state-owned enterprises, are a major cause of economic concern. This year, ccording to official estimates from the Ministry of Finance, eight major PSEs received more than  US $3.5 billion in support from the federal government, which is higher than the federal component of Pakistan’s development budget. According to the Ministry of Finance, “Inefficient public sector enterprises are draining fiscal resources and choking the economy.”

A major reason that these companies lose so much money is a low level of transparency and poor governance; but historically, any discussion of the governance of Pakistan’s PSEs was taboo. Successive governments used these companies to provide jobs to their supporters. Moreover, non-transparent financial transactions continued to drain resources while reducing PSEs’ operational efficiencies.

Understanding the political sensitivity of the issue, CIPE’s Pakistan team has taken a subtle approach to the reform of PSEs, with patient efforts aimed at generating a debate on the importance of a introducing a code of corporate governance for PSEs. These efforts began to yield results when, on CIPE’s advice, the Ministry of Finance constituted a taskforce in October 2011, comprising a wide range of stakeholders, including relevant ministries with ownership of PSEs, private sector representatives, the Securities and Exchange Commission of Pakistan (SECP), the Pakistan Institute of Corporate Governance, and others. The taskforce became the driving force behind a productive debate. As a result of several meetings and a consultative process, on March 22, the SECP released new draft regulations for PSEs.

Recognizing Pakistan’s unique regulatory framework, under which ministries are the owners of relevant PSEs, existing codes of corporate governance were not sufficiently relevant to these firms to ensure local buy-in. Instead, CIPE advised the taskforce to develop a homegrown solution that would still be based on international best practices. After careful consideration and study of international models, a technical committee appointed by the taskforce prepared the draft regulations to correspond to the complex reality of public sector enterprises in Pakistan.

“The draft regulations have been designed in view of the distinct governance challenges faced by the PSEs. Recommendations made in the draft regulations include measures to optimize efficiency, enhance the transparency of operations, and provide a mechanism for accountability of management.”

Securities and Exchange Commission of Pakistan

The draft regulations are now available on the SECP’s website for review and comment.

In order to generate further public debate, and to build awareness about corporate governance of state-owned enterpises, CIPE also assisted the taskforce in organizing Pakistan’s first major roundtable on governance of PSEs, on April 10 in Islamabad.  This event received an overwhelming response, with over 125 participants from various PSEs attending. Moreover, a subject which, as mentioned, was previously considered taboo in Pakistan, received extensive media coverage.

Restructuring the Private Sector in Pakistan

As many as half of the companies listed on the Karachi Stock Exchange are family-owned enterprises. (Photo: The Express Tribune)

Writing in Dawn on January 3, 2012, Dr. Shahid Kardar, former governor of the State Bank of Pakistan, painted a gloomy, yet realistic, picture of the country’s macroeconomic imbalances. It seems clear that the crowding out of private sector investment due to excessive government borrowing from commercial banks that he describes is closely linked with structural problems within the private sector. These problems, in addition to a smaller window for bank lending to the private sector, include weak corporate governance in many family-owned enterprises, and a lack of equity investment through stock exchanges. Unless structural reforms are introduced in the private sector, which will require action by regulators and businesses themselves, macroeconomic stabilization alone will not bring Pakistan out of its low growth equilibrium.

Dr. Kardar’s arguments regarding the crowding out of private sector lending due to government borrowing at risk-free rates are indeed well-founded. Overall trends in bank credit to the private sector in Pakistan are declining, not only when measured over time, but also in comparison with other regional economies. Within South Asian Association for Regional Cooperation, Pakistan ranks last out of seven members in terms of domestic and commercial credit for the private sector.

According to a December 27, 2011, presentation made by a representative of the Federation of Pakistani Chambers of Commerce and Industry at a conference in Islamabad on “Economic Connectivity and Regional Trade,” domestic credit to the private sector in Pakistan represents 21 percent of GDP. This is better than Afghanistan – where domestic credit barely rises above 10 percent of GDP – but in India, this figure is 50 percent, in Sri Lanka, it is 28 percent, and in the Maldives, it is 65 percent.

The State Bank notes that government borrowing from commercial banks increased by Rs 590.2 billion ($6.4 billion US) in FY 2011, compared with an increase in private sector credit of Rs 121.3 billion ($1.33 billion US). The State Bank clearly states that “there is little doubt that government borrowing is distorting credit conditions for the private sector.”

Given populist tendencies in both the central and provincial governments, it seems unlikely that the government will get out of the way and let the private sector partake of commercial credit. In this light, it is fitting to ask what alternatives we have to facilitate private sector growth, to allow the private sector to lead the country on a path of economic recovery. One answer is an agenda for private sector restructuring, presented below in an effort to generate further discussion.

It is evident that Pakistan’s largest firms, even those listed on stock exchanges, are essentially family-owned enterprises. According to sources in the Karachi Stock Exchange, family-owned enterprises comprise as much as half of the 660 listed companies. These enterprises typically resist expansion through the dilution of shares, even at the cost of growth. While control over assets is a basic economic right of these families, engaging professional management, with a reasonable stock options structure for these executives, can help such enterprises to expand.

There is a clear need to work with Pakistan’s family-owned enterprises to encourage adoption of the Code of Corporate Governance and equity-dilution models. In this context, the Pakistan Institute of Corporate Governance is doing important work along with the Securities and Exchange Commission of Pakistan (SECP). While changing attitudes is not easy, adopting appropriate frameworks and systems can facilitate the process.

Next, these families also need assurance that the threat of nationalization, still fresh for the oldest generation, is no longer a reality, and that they will themselves be the greatest beneficiary of expansion. Another important incentive for family-owned enterprises, both listed and unlisted, to follow the Code of Corporate Governance, will be greater access to funds, as lenders and investors alike feel more comfortable working with firms that adhere to the highest standards of corporate governance.

Further, it will be necessary to work with stock exchange stakeholders, including investors, and front-end and back-end regulators, to encourage long-term equity investment in the shares of listed companies, rather than day-trading, as well as to facilitate a favorable climate for new IPOs. Stock exchanges should be a place for raising new funds for expanding enterprises. Unfortunately, the number of IPOs launched in the last five years in Pakistan can be counted on one hand.

In conclusion, Pakistan faces an immediate need for private sector restructuring, comprising reforms in corporate governance of family-owned enterprises, and greater regulatory oversight of stock exchanges. This may involve national-level consultation and coordination among the State Bank, SECP and stock exchange regulators. While there is no easy way out of the current economic crisis, shifting the argument away from the country’s much criticized macroeconomic management, and instead to need for private sector restructuring, could help steer decision-makers in an important direction.

Intellectual property rights law important for Pakistani businesses

P@SHA roundtable on digital IPR (Photo: CIPE Pakistan)

Effective protection of intellectual property in Pakistan has been impossible in the absence of legislation that would improve the enforcement of trademark, copyright, and patent laws. Although 2007 Presidential Ordinance created the Intellectual Property Organization (IPO) of Pakistan tasked with management of intellectual property and enforcement coordination, legal protection of businesses whose intellectual property rights (IPR) were violated remained weak.

As a result, Pakistan continues to rank poorly in international indices when it comes to IRP and patents protection as well as copyright piracy. One highly affected segment of the economy is the technology sector where success and profitability depend on being able to protect one’s inventions.

To address these issues, back in April 2009, CIPE in partnership with the Pakistan Software Houses Association for IT & ITES (P@SHA) organized a roundtable on “Digital Intellectual Property Rights Issues and Their Impact on Business.” The key recommendation at the roundtable was to enact a legislation that gives better protection to intellectual property.

Following the roundtable, P@SHA and other stakeholders remained in close contact with the IPO. After two years of regular deliberations with the policymakers and the private sector, IPO has now finalized a draft law – the IPO Ordinance – to provide legal coverage to enforce the trademark, copyright and patent infringement laws.

The new ordinance is likely to be approved in the next meeting of the Federal Cabinet. It is expected make the law enforcement agencies legally bound to protect IPR. The ordinance would also allow for revision in the trademark and patent fee structure, establishment of IPR facilitation centers in major chambers of commerce, and a nationwide awareness campaign for IPR protection that would explain its benefits for the economy and private sector.

Announcing this, IPO Chairman Hameed Ullah Jan Afridi informed that Federal Investigation Agency (FIA) has already established a dedicated IPR Cell and Police and Customs are in the process of creating IPR Cells to improve enforcement. The ordinance also proposes that the federal government empower IPO to become an enforcement agency and to function independently without seeking help from other law enforcement agencies, following the model adopted in Mexico.

More and more intellectual property is being created in the digital domain in Pakistan – not only by IT firms but also by production houses, photographers, health professionals, education professionals, artists, musicians and all other types of businesses. In pursuing successful advocacy in support of the IPO Ordinance, P@SHA recognized the fact that the needed reform in the legislation dealing with IPR will not only safeguard the rights of its member IT companies, but also protect and encourage innovations that are taking place throughout Pakistan’s economy.

When will Pakistan say no to corruption?

Image: sodahead.com

In 2010, Transparency International (TI) ranked Pakistan as 34th most corrupt country in the world (143 amongst 178 countries surveyed). According to the TI report, the overall corruption trend in Pakistan is alarming. For example, in 2009, $2.3 billion were siphoned out, increasing to $2.63 billion in 2010. This latest report highlighted the government’s unwillingness to plug the holes in the management of various public agencies and state-owned enterprises to stop this pilferage. That led to a scuffle between TI and the ruling PPP (Pakistan Peoples Party) government, resulting in Transparency International Pakistan’s (TIP) inability to conduct a survey this year.

According to the 2010 National Corruption Perception Survey (NCPS), tendering has been among the most corrupt sectors which – as Syed Adil Gilani, Chairman TI Pakistan noted – “eats away at least 40 percent of Pakistan development budget.” One of the key causes of corruption is the appointment of corrupt people at the senior positions in government departments and in the public sector companies. Recently the Supreme Court has taken several suo moto notices (i.e. notices taken on the Court’s own initiative) exposing corruption in the public sector and a number of cases stemming from mismanagement and corruption involving questionable appointees are being heard at the Court. For example:

  • National Logistic Cell – improper investment of $0.05 billion of NLC’s money in Stock Exchange; NLC is the largest logistics and freight-handling company in Pakistan.
  • National Bank of Pakistan – financial mismanagement causing massive losses to the NBP (largest financial institution in the public sector) and national exchequer.
  • Evacuee Trust Property Board – This trust was created at the time of the Partition and still has property worth billion of rupees under its ownership, most of which is rented out. A recent scandal involved investment of $11.65 million of trust money in real estate business at a speculative profit rate of 34 percent, lacking the approval of Federal Government, State Bank and Securities & Exchange Commission, and violating rules for investment of public money; this action created a financial burden on the 45,000 poor tenants of the trust properties.
  • Oil & Gas Development Corporation Ltd – appointment of the managing director was cancelled by the Supreme Court based on his prior conviction in a corruption case; OGDC is Pakistan’s largest oil and gas producer.
  • National Insurance Corporation Ltd – illegal investment of $0.02 billion in real estate; NICL is a leading insurer of public properties.

Such a phenomenal increase in corruption in Pakistan has damaged the country’s reputation. The first step towards improving Pakistan’s credibility and reducing corruption at the highest level is to ensure that honest officers are appointed through proper merit procedures. That will start only by appointing credible persons to the federal and provincial public service commissions, which are agencies responsible for appointing civil servants, and empowering them to select and place qualified and credible staff at the state-owned organizations.

Keeping the economy out of political crossfire

The Pakistan Business Council’s (PBC) agenda for economic reforms calling for reducing public finance deficits and increasing education, health and income support expenditures and reforms in the energy sector, closely echo voice of the nation as also reflected in the demands made by various political parties. By listening to the PBC leadership, the President has given the clear signal that without taking private sector on board, no economic reforms can be successful.

In order to be successful, the dialogues of the government with the business community at various levels must, however, make a quantum leap from the way in which similar talks have been conducted in the past, when political quarrels prevented any substantive debate on economic issues. This time, the government, along with its coalition partners, should present its case as one unified body, with no room for rhetoric mongers in its delegation, but rather bringing to the table seasoned and credible policymakers with deep knowledge of economic issues. The message to the business community and to the people of Pakistan should be clear: it is time to keep politics out of economics.

Despite past shortcomings, a consensus is not completely implausible. A quick review of the agendas of the stakeholders reveals a great deal of overlap and sufficient room for finding common ground among all of the participants. For instance, the business community says its objection to the Reformed General Sales Tax (RGST) is directed at the way it will be implemented, giving a greater role to the inept Federal Board of Revenue (FBR) in processing and calculating tax refunds for businesses.

Moreover, the private sector has called for austerity measures and lambasted colossal government borrowing of nearly Rs 1.17 trillion which has led to literal crowding-out of private borrowing. From 2005-07 to 2008-10, government borrowing increased by 400 percent, while private domestic borrowing fell 83 percent from Rs 768 billion to Rs 132 billion. The business community has also criticized state-owned enterprises (SOEs) for swallowing a whopping Rs 350 billion from the treasury, and called for the recovery of, and accountability for written-off loans to SOEs.

The economic reform proposals contained in the ten-point agenda generated by the opposition Pakistan Muslim League-Nawaz (PML-N) are not too different.

PML-N has asked for the implementation of Supreme Court decisions, a return of defaulted or written-off loans taken out by businesses and politicians from the government or government-run banks, immediate restructuring of SOEs, and relief for price increases on common consumer goods in order curb inflation, and a 30 percent reduction in government expenditures.

Likewise the proposal of the Muttahida Quami Movement (MQM) to steer the country out of the current fiscal and economic crisis recommends imposition of an agricultural tax, withdrawal of support prices for wheat, reform of agricultural land holdings, revamping of SOEs, recovery of loans, and reform of the FBR.

Yet, there has been progress in the major political parties’ understanding of the urgent need for economic reforms. They are unanimous in their calls to restructure, dissolve or sell off SOEs, reduce the size of the government, and impose taxation across the board (while an across–the-board tax imposition is not the most pro-market policy, it is necessary when the country’s tax-to-GDP ratio is 9.5 percent). It is very clear that a political consensus has already evolved toward the core agenda of strengthening Pakistan’s market economy. PBC’s economic agenda also suggests that the business community has come of age, by advocating for concrete economic reforms rather than more concessions.

This emerging consensus calls for a series of high-level consultative dialogues between parliamentarians, government and the business community at all levels. Its need has become imminent as the present government prepares its forth budget. With each passing day, Pakistan’s economy is becoming increasingly unsustainable, and if it continues on the present trajectory, it will soon be on the brink of collapse.

This text originally appeared in Dawn, the largest newspaper in Pakistan. The author is CIPE’s Pakistan Country Director.