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The reform business

Updated May 13, 2013
Illustration by Abro
Illustration by Abro

Over the past two decades, reform has been the buzzword in Pakistan’s politico-economic discourse with the hope that it can bring about a progressive change in economic conditions through improved quality of governance.

To move out of a system run by highly politicised bureaucratic setup, a number of regulatory bodies were carved out to facilitate transition to a competitive, transparent and equitable environment, enable the private sector to prosper and create job opportunities while protecting consumer interests.

The regulators became parking lots for retired bureaucrats who, instead of pushing the reform process, attempted to protect a culture they had promoted in 30-plus years in government service (or as international consultants,) made fortunes out of various often failed experiments and moved out or stayed put to sell another assistance programme for more.

But the net outcome of this debate and exercise has been further deterioration of the existing system and the public institutions or at best, continuation of the status quo. Taxation system, power sector, public sector enterprises and stock markets are just a few examples.

The bureaucratic set up remained untouched all along and in fact expanded its reach and power from normal civil services to an enlarged regulatory domain. The only ‘reform’ they facilitated was the increase in salaries and monetisation of transport facility against which they secured hefty payments from the exchequer.

At the same time, it would, however, be unfair if the key progress in improving the governance is ignored in the banking sector, improvement in code of corporate governance for listed companies and relatively better regulatory framework by the State Bank and the corporate watchdog, even though small depositors, minority shareholders and minor investors in the banking sector and stock exchanges remained hostage to powerful brokers and bankers.

But that was understandable given the fact that most of the time the transparency in appointing top men at these two regulators remained questionable, politically motivated and nominated by influential lobbies and the political elite. On the wider horizon, however, the federal and provincial governments remained aloof from governance-related reforms. Even in the most critical areas like the power sector and revenue mobilisation, the reform process had either been abandoned or forgotten as is evident from their performance over the years.

Take for example the reforms in the taxation machinery and mechanism where a $150-million World Bank-funded tax administration and reform project (Tarp) spread over a period of six years has officially been declared as ‘unsatisfactory’ or failed project. Simply put, the tax-to-GDP ratio that stood at about 11.5 per cent when the project was launched in 2005 tumbled down to about 8.5 per cent on completion of the project in December 2011.

Yet, the World Bank is again negotiating with the bureaucrats these days a fresh programme (Tarp-II) to sell $300 million credit line to Pakistan to further the uncompleted agenda in the taxation system. In its final assessment report on Tarp-I, the World Bank attributed the programme failure to a highly volatile political and security environment having serious consequences for project implementation, including non-implementation of the broad based general sales tax — the key objective of the programme.

Besides the GST-related reforms, the programme envisaged improving the integrity of the federal tax machinery and to motivate its workforce. From public perception, the Federal Board of Revenue stands on the lowest ladder of integrity among public sector institutions and its staff appeared to be the most de-motivated cadre as is evident from a steady decline in tax-to-GDP ratio.

Talking about the merger of various service cadres — customs, sales tax, excise and income tax, etc, — of the revenue machinery into a centralised Inland Revenue Service, the Bank opined that reforming the FBR alone was insufficient to bring in expected collection targets operating within a narrow based, non-transparent, and complex tax legislation. In particular, the lack of approval of a broad-based Vat legislation, or reformed GST, proved a major constraint for the project to achieve Project Development Objectives.

“The depth of the organisational reforms embraced by the project, even if implemented gradually as advocated by the Bank, entailed a fundamental and complex change with highly unsettling potential consequences for an organisation facing internal struggles to reform. The litigation and the WB Inspection Panel review, initiated by groups of FBR staff associations, have highlighted that additional mitigation measures should have been proposed at the outset to ensure a gradual but effective management of organisational change, while providing safeguards for an equitable and fair treatment of all staff along the reorganisation process”, said the World Bank.

On top of that the Bank also noted overall lack of reform ownership by FBR rank and field officers, frequent changes of FBR leadership, and delays in formation of the project management unit and readying procurement packages before loan approval, undermined continuity of project management, weakened implementation monitoring, slowed procurement, and hindered financial management and disbursements that negatively affected the project implementation.

The bank also said the initial project implementation was negatively affected by lack of preparedness on key strategic choices on information technology strategy, fiduciary arrangements, and inadequate Bank technical support.

The Bank also conceded the lack of vision and the assessment of the situation on ground, but there is no guarantee these mistakes would not be repeated under the proposed second phase of the project. “The project was implemented within a more volatile and risky environment than originally estimated, due to a combination of factors, such as: adverse economic circumstances, a challenging political environment with frequent changes of political authorities and FBR staff at the senior levels, turnover on Bank supervision teams, strong internal resistance to change, adverse country security issues, and unstable infrastructure needs, such as power supply”, it said.

All in all, the Bank reported that the government of Pakistan has showed inconsistent commitment to its tax administration reform agenda, which significantly affected implementation of the Tarp. Yet, the World Bank is finalising another reform programme.