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Effective regulation

October 25, 2012

A FACTORY owner I interviewed a few years back on the cost of doing business in Pakistan, had complained that he was paying a number of officers from various departments to keep them off his back.

The total amount was substantial but he said that he was willing to add that to his cost of business, and pass it on to his customers. However, the hassle of dealing with each officer and department was too time-consuming. He said he would prefer to have a single window where he could deposit all the taxes and all the bribe money, for all departments, every so often.

One particular instance stood out in his memory. He had been refusing to see one of the officers from the Civil Defence Department thinking that since he was paying all his legal dues, he did not have to see the officer in question. But the officer kept insisting that he had to meet the factory owner.

Finally when he met the officer, the latter told him that under the powers vested with him, under the Civil Defence Act, the officer could visit the factory as often as he liked and, on as many occasions as he deemed necessary, interrupt the regular business of the factory to impart civil defence training to the workers. Would the owner prefer frequent interruptions or would he prefer to pay a few thousand rupees extra to keep the officer at bay?

The owner thought it would be too much of a hassle to complain about the officer to higher ups and that might cost more, so he chose to pay the few thousand extra per month.

This was not the only factory owner I interviewed who complained about graft and harassment by government departments. And a lot of them seemed to suggest that this happened even if a factory owner tried to abide by all relevant rules/regulations.

But, of course, most factory owners do not want to abide by all the rules and regulations, whether they are labour laws, environment laws or safety regulations. Abiding by regulations adds to the cost of doing business. For them this situation is much better than having efficiently working departments.

Mutual understanding between department officers and the factory owners can give gains to both, at the cost of the government (in terms of any lost tax revenues) and at the cost of regulatory objectives that forced the creation of the regulatory framework in the first place.

Most recently, factory fires in Karachi and Lahore have brought the regulatory failures tragically and glaringly to the fore.

Whether these were errors of omission or commission is something that still needs to be determined. But even preliminary reporting showed that a number of regulatory standards had clearly been breached in both cases.

There have been many other such cases that have happened and many are still happening: boiler explosions, CNG cylinder explosions, elevator failures and so on. Our newspapers keep reporting such cases almost every day.

As part of the structural reform and liberalisation programmes that were started in the late 1980s and early 1990s, the wisdom of the day was that we needed to reduce the cost of doing business in Pakistan to make our business environment competitive and comparable to that in other countries.

One of the ways of doing this was assumed to be by moving government out of the sphere of business. But we took the measures too far and did so without working out as to what was needed as a regulatory framework in this new environment. We thought that moving government out of business meant getting most departments to not visit businesses anymore. So, as part of the various reforms, usually supported through structural reform agreements with World Bank/Asian Development Bank, most of the provinces across Pakistan removed, formally or informally, the power of department personnel to make surprise or sometimes even scheduled visits to factories. The restrictions were hailed as a good step by the owners while the interests of labour were, given the prevalent ethos, easily ignored.

In some cases, as in the restriction on random labour inspections, we even ignored our international obligations and hence undermined implementation mechanisms for labour laws. It is almost impossible to implement relevant labour laws, safety laws, health laws and some other workplace-related laws without the power of random inspections.

What was not understood, in the quest for liberalisation, was that the latter does not mean the absence of regulation. It means ensuring efficient regulation.

Absence of regulation or absence of an implementation mechanism is an invitation for businesses to ignore concerns in that area. If elevators are not examined, their maintenance will be ignored. If checks are not kept on fire equipment and potential fire hazards, people will cut corners. And this is exactly what has been happening.

Between giving too much discretion to officers and not having any effective regulatory mechanism, what was needed, under liberalisation, was the creation of more effective mechanisms.

In some areas this could have meant forcing business owners to buy insurance from commercial firms so that it would be insurance companies that would carry some of the burden of inspection, or help develop third-party inspectors in the private sector. But these options were not explored or developed.

A lot of work needs to be done in every market and area of concern from the point of view of regulation. Recent industrial accidents have been truly tragic but a bigger tragedy would be to forget the issues they have raised and not do anything to create the right structures.

Whether we are dealing with building codes or zoning codes, fire safety codes, health/environmental codes, quality controls or warranty mechanisms, these have to be created and proper implementation mechanisms for them devised. All of this work needs to happen at the level of provincial/local governments.

The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.