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| December 03, 2006 | Sunday | Ziqa'ad 11, 1427 |
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Punjab reshuffle
Organ law in the offing?
Forensic report: does it shed light?
Everybody’s problem
THE forensic investigators have submitted a report that provides a sophisticated bailout of not just large brokers but also absolves almost everyone of any misdeed that might have contributed to the stock market crash of March 2005. While failing to dwell on the reasons that led to the crash it seems to suggest that such outcomes are part of the course and that we should all learn to live with the recurrence of such events since risks and rewards in inherently risky securities markets are part of the game.
AS many as 31 new and redesigned ongoing projects costing Rs82 billion were approved by the Executive Committee of the National Economic Council on Thursday, decisions that also reflect underlying official development strategy. With an allocation of Rs59 billion, the first priority has gone to upgrading physical infrastructure, badly needed to cut business costs, boost investment and integrate the fragmented domestic economy into a unified single market. The second-highest investment of Rs17 billion has been earmarked for the social sector, considered vital for improving household incomes and socially sustainable development. In this limited perspective, the government also seems sensitive to regional development as demonstrated by the sizable allocations for the smaller provinces. Against Punjab’s five projects costing Rs5.3 billion, seven worth Rs20 billion will be implemented in Balochistan, followed by four costing Rs19 billion in Sindh and six projects in the NWFP involving an investment of Rs11 billion.
But the lion’s share of Rs59 billion would come from the federal government, indicating the inability of the provinces to self-finance most of their development projects. In the absence of fiscal autonomy, they are heavily dependent on the centre — a denial of their right to autonomous economic development. This unitarist approach is also evident in the decision of the federal cabinet to build mega dams in complete disregard of their impact, particularly on the agriculture and environment of the lower riparian — Sindh. The decision has come in the wake of the growing provincial disharmony accentuated by such issues as Kalabagh and perceived or real unfair distribution of national resources under the interim National Finance Award. Besides, the building of five dams — Kalabagh, Akhori, Munda, Diamer-Bhasha and Kurram Tangi — would divert billions of dollars of investment into the provinces where these dams will be located, bringing an economic upswing there. The resulting skewed distribution of tax revenue, foreign debts and federal resources would further perpetuate the uneven level of inter-provincial development. By their very nature, the mega projects will provide business to big contractors, suppliers and financiers. Given the dismal disparities in regional and household incomes, one would strongly advise the government to review its decision on building big dams. Also, in view of their environmental and political implications, the solution lies in seeking viable alternatives, particularly the building of small dams and mini power-generating units by harnessing the vast potential offered by rivers and canals — the largest network in the world. In this case, the beneficiaries would be mostly small businesses. It would bring countrywide prosperity and create an affluent market for much faster economic growth and development.
Yet another disturbing aspect of development spending is the cost overruns of projects: of the Rs82 billion, Rs25.5 billion is for ongoing projects. The cost of seven of these projects has increased by Rs9.4 billion from Rs16.1 to Rs25.5 billion. The cost escalation in the case of the Right Bank Outfall Drain (RBOD) is a hefty seven billion rupees because of interest payments, design change and capacity increase in Balochistan. The project design, appraisal, monitoring and delivery systems need to be vastly improved to get right returns on investment. Often projects are initiated on political grounds and their appraisal is tailored to suit arbitrary decisions. The deputy chairman of the Planning Commission has asked all government institutions to implement decisions in respect of the five dams. The Executive Committee of the National Economic Council will meet soon to rubber-stamp the cabinet decision. It is like putting the cart before the horse.
THE major reshuffling of Punjab ministers’ portfolios, appointment of new ministers, advisers and special assistants — by the dozen — and a similar reassignment of posts among the administrative cadre come at a time when there is less than a year to go for the next election. The timing makes the changes on this massive scale look suspicious: it cannot be just to better the performance of the Punjab government. Good governance has eluded this most populous and prosperous of the federating units; political rivals accuse those at the helm of affairs of ineptitude, corruption and politicking. Twisted criteria based on loyalties are applied when bestowing laurels on civil administrative officers too. The high-handed among the police and the compliant among the bureaucracy rake it all in, while those abiding by the rule of law are punished with transfers to innocuous posts. The latest changes at the provincial ministerial and administrative levels come a bit too late in the day. For instance, if the performance of the two ministers who were in the saddle for four long years and are now sent packing was not good, they should have been shown the door a long time ago. The newcomers too are ghosts from the recent past: the erstwhile advisers to the Punjab government who were booted out under a high court order in October for having been appointed out of turn. As the French saying goes, ‘the more it changes, the more it remains the same’.
The political motives behind the latest changes are all too clear to be seen otherwise: the ruling PML is jittery about the developing rapprochement between the army establishment and the PPP led by Ms Benazir Bhutto. While the ruling party may not be as free at the centre to implement similar changes to gain an electoral head start in the months ahead, Punjab remains its fiefdom. The province is ruled with impunity, with political opponents’ rallies banned, their leaders often detained and released at whims, and the public denied the right to assemble. Only time will tell how long the ruling PML can get away with it all.
FOLLOWING a ceremony held recently at the Sindh Governor House to honour kidney donors, lawmakers have once again been making promises to enact an organ donation bill drafted more than a decade ago. In addition, the Supreme Court has also taken an interest in the matter and has directed the attorney-general to provide information on the existence of legislation to restrict illegal organ sales in the country. Coming together, these are positive signs that the bill might be passed soon in the form of the Human Organs and Tissues Transplant Act. If it is, it will make a big difference to the lives of thousands of renal patients in the country who otherwise have to put up with the tedious procedure of dialysis as they wait for a donor. The law would provide legal cover to deceased organ donation as well as encourage voluntary donors. At the same time, it would act as a deterrent for unscrupulous doctors and middlemen who are currently reaping huge profits from the growing organ racket in the country. This illegal trade is driven mostly by the poverty-stricken who sell their kidneys in their attempt to escape utter destitution.
With many Muslim governments adopting similar laws, Pakistani legislators should be able to overcome any resistance posed by the religious lobby. However, what needs to be actively supported is a culture of voluntary donation, in life and in death. There is a need to mobilise public opinion on the issue so that people are not averse to the idea of donating an organ after death and family members keeping good health do not hesitate to donate a kidney to extend the lifespan of a loved one. Without such a campaign and a regulatory law, the illegal trade will take on other nefarious aspects such as the removal of organs by force or stealth.
This rejoinder will argue that a report is incomplete and its conclusions flawed in places. The macro data reviewed by the Task Force is regarded by the investigators as not providing sufficient evidence to draw any conclusions on the occurrence of wash trades — for reasons ranging from the lack of a unique identity code for each investor and the existence of benami and group accounts to the presence of dhobi brokers and the inconsistent and often incomplete nature of trading records, (the Task Force had itself acknowledged and stated clearly that the anonymous nature of these transactions was a factor that had clouded tracks of potential cases of market abuse).
It is quite amazing that the forensic investigators used the same aggregate data to absolve all brokers of any wrongdoing whatsoever! If the claim is that the available evidence could not support the Task Force’s suspicions (since no specific allegations were made in the report of the Task Force on this account), one cannot argue that the same “inadequate” data proves that all brokers were innocent, despite their own confession that they were “not able to analyse the type of trading related data that is normally generated”.
In other words, if the macro data could not provide an affirmative answer to the Task Force’s questions, it could not also logically rebut the allegations (even if they had been made) levelled by the Task Force. The investigation of such data should have been equally inconclusive. Therefore, the categorical statement of the investigators certifying the purity of the brokers raises doubts not only about the quality of the conclusions of the forensic report in this area, but also leaves one guessing as to why, on the basis of data of “dubious” quality, the investigators needed to go out of their way to issue a clean sheet to those regarded by the public at large as the main suspects. In the opinion of this writer, the prime responsibility of the investigators should have been to examine the underlying micro data (supposedly their core competence), the accounts of brokers and those of their clients and some transactions, and provided an explanation of what happened in the fateful month of March 2005. If the investigators were unable to lay their hands on such data, for whatever reason, they should have said so and moved on.
The investigators assert that one of the factors that caused the crash was not the withdrawal of badla but the policy of the SECP to phase it out for some scrips, and that badla was not withdrawn as a result of voluntary action of any influential broker. This conclusion flies in the face of representations made to the Task Force by a host of market players. Respondent after respondent reported that badla withdrawal was a key factor precipitating the crash of March 2005, — an outcome also supported by macro-level data.
Some badla providers explained that they stopped financing because they began to worry about the sustainability of the rise in the market and the ability of badla borrowers to repay their loans. Nowhere did the Task Force report contend that it was just brokers who were withdrawing badla; the report accepted that brokers could have been withdrawing funds on behalf of their clients.
In fact, the mutual funds withdrawing badla had defended their action on the rational plea that they had no responsibility to the investors, their prime responsibility being to protect and augment the interests of their unit holders. What the Task Force had highlighted was that some badla providers had sold in the March futures, contracts at prices higher than in the ready market from which they were withdrawing badla.
Also, contrary to the contention of the forensic investigators, it was not argued anywhere in the report, except in the case of futures contracts, that there was collective manipulation and wrongdoing in this area. In fact, the Task Force had proposed a detailed forensic investigation to ascertain facts and determine if manipulation had taken place.
In their zeal to discredit the Task Force and target its report by claiming that they did “not find sufficient evidence to support the paramount scheme of manipulation in the manner put forth by the Task Force”, the forensic investigators put in extraordinary effort to reading between the lines of the Task Force report and left themselves with precious little time to read what was actually said in plain words.
The report of the Task Force never suggested that brokers conspired collectively to use manipulative practices through wash trades nor did it conclude that they colluded to systematically restrict COT availability. The Task Force’s categorical and specific charges are with respect to manipulation by some brokers (in collusion with KSE management) in the futures contracts when “some of the large brokers began efforts to design bailout plans for potential default, possibly aimed at protecting their own interests”. It refers to the extended COT session conducted on March 25, to benefit themselves, in complete violation of normal trading rules, when futures positions were treated as if they were ready market transactions.
This allegation is grounded in fact and quoted at length in the report of the Task Force. The report tracks the return to the scene of the badla providers to support the same scrips for which they had withdrawn badla during the period March 8 to 14. The Task Force report challenged the assertion of the badla providers that they had stepped in to save the market, arguing that the latter were aware of the adequate deposits of margins with the KSE and that the return of the badla providers was likely to have been to protect their interests. They also raised the interest rate on this badla from 18 per cent to 24 per cent, a strange way of saving the market!
Similarly, the report did not say that brokers “sold shares that they did not actually own” and purchased them in the ready market at highly discounted prices. It simply said that it could have happened and that this required a more detailed broker-level examination. Even here the investigators find themselves on a weak wicket. If, because of group accounts, the possibility of “blank sales” having taken place-could neither be confirmed nor disproved, then the forensic investigators could not challenge the suspicions of the Task Force.
It is interesting that while agreeing with the Task Force that there could have been manipulation in the futures market on the matter of the extended COT session on March 25, the description of which occupies a fair amount of space in the report of the Task Force, the forensic report has essentially chosen to gloss over the relevance of this action of the brokers. One wonders why?
It is also intriguing that the investigators at no stage considered it necessary to speak to the Task Force members. They never met the latter before commencement of their assignment or even during the investigation to discuss their findings and how their conclusions differed with some of the concerns raised by the Task Force.
Finally, considering the positive image that they present of Pakistan’s capital market and the touching faith that the investigators seem to have in the integrity and pristine practices of the large brokers, would it be too much to ask them to put their own money on the line by investing in Pakistan’s stock market a part of their earnings they were paid for this assignment?
The writer is a former finance minister of Punjab.
FIRST it was blamed on Thanksgiving: the sell-off in the US dollar was the result of turkeys being digested by Wall Street. But the dollar’s decline has continued long after that holiday ended and now threatens to slide all the way to Christmas.
Some argue that a dollar worth only 50p or 70 euro-cents is the best gift the US could hope for, by making America’s exports more competitive. Is it time to dust off the old quote from a US treasury secretary that “the dollar is our currency, but your problem”? Actually, this time the dollar’s gymnastics on the currency markets look like giving the US some problems of its own. The wider ramifications, too, look far more serious than the prospect of cheaper iPods for British tourists.
Currency markets can seem to jag up or down from day to day, but underlying movements are prolonged and relatively slow. The dollar has been on a downwards trend for some time — so far this year it has lost ten per cent against the euro — and the latest bout of weakness is a symptom of deep imbalances in America’s economy, in particular a tendency to live on borrowed money.
A weaker dollar makes US exports cheaper and imports more expensive, so in time it should rebalance things. But the initial effect, given the US appetite for imports remains voracious, will be price rises.
— The Guardian, London