Vested interests are creating discontent over privatization making the process painfully slow with the values of government owned assets continuously declining and liabilities increasing with every passing day.
The privatization process went rapidly during the first tenure of the PML-N government when in a span of less than three years, major state owned cement plants, most of the ghee mills and all rice mills were privatized. Two major banks and two big tractor plants were handed over to the private sector. During that period the state owned chemical plants, some steel manufacturing units and textile units were also privatized. All these entities were running in loss when in the government sector, bleeding the national resources.
Now all these entities have created more employment, and deposited hundreds of billions in government taxes and levies. In fact, some of the privatized units are paying 20-100 times more taxes than the amount at which they were privatized. MCB Bank, that is half the size of National Bank, is in fact paying more income tax. Pakistan had to periodically import ghee and vegetable oil when the ghee industry was run by the government. The availability of cement remained uncertain during the period when these plants were run by the public sector. The second privatization of some significance was carried out during the Musharraf era, and even that has paid rich dividends to the nation.
At that time the entire nation had no issues regarding privatization, the opposition to this process intensified in the last decade. There is a need to find out the elements that are opposing privatization. The bureaucracy seems to be the top beneficiary in the public sector companies. The bureaucrats in the Ministry of Industry control the public sector companies. Top bureaucrats are deputed in these enterprises at lucrative salaries and perks. These state owned enterprises continue to operate even at heavy losses, but the perks/privileges of the top management continue to increase every year. Moreover, the only stake they have in the purchase of the enterprise is when they have a chance of getting commissions.
The qualities of supplies have to be inferior. The procurement rules are engineered in such a way that only favored suppliers are qualified to quote the rates by registering dummy enterprises of the favoured supplier. They quote lower prices because they supply low grade materials. If an outsider dares to supply the same quality, his supplies are rejected on quality grounds. The entrenched bureaucracy in the SOE creates hurdles in the privatization process by raising a fear among the workers that their jobs would be in danger. They also inform the rulers that their prerogative of accommodating friends, family members and party workers would be compromised if the state enterprises are privatized.
The labour unions are deadly against privatization, because no private sector operator would succumb to their pressure as easily as the bureaucrats with vested interests. The workers under the unions have regularly lost many privileges, but the perks of union leaders continue to increase. They do not perform any duty and collaborate with the bureaucracy in organizing demonstrations against privatization.
Then there is the private sector that has the resources to buy the most valued SOEs, but they want to buy it at dirt cheap rates. To achieve their aim they plant stories in the media alleging a secret deal of the government with a particular private sector group for handing over a particular enterprise at a throwaway rate. This puts pressure on both the government and the entrepreneur to deny the rumor but also makes it embarrassing for the group to participate in that particular privatization leaving the opportunity open for the rival private sector groups.
It is pertinent to note that the enterprises like Pakistan Steel Mills, PIA or public properties like the Roosevelt Hotels are very expensive and only few top groups in Pakistan could buy them. If we systematically tarnish the image of all these groups we would eliminate the local competition for acquiring such SOEs. This would leave the field open for foreign investors only. Unfortunately, there are few foreign investors that are interested in committing their resources in Pakistan. This further narrows downs the competition to a few, which is not in our national interest. The prices that we get would then be very low. We have seen this in the privatization of Habib Bank and United Bank where as a result of elimination of domestic competition, these were sold at a rate which is now the profit that the foreign owners send abroad every year.
Increase in tax revenue by 18.2 percent in the first nine months of this fiscal is commendable in view of the low average inflation of around 3 percent and stable rupee that also depicts the potential of taxes in the country. This money should be used for useful purposes instead of wasting it on inefficient and corrupt state enterprises.
The increase in tax revenues should be appreciated as Pakistan is plagued with low tax to GDP ratio which clearly indicates vast tax evasion. Tax revenue targets in Pakistan are mostly set without considering the targets achieved or missed in the preceding year. The targets are aimed at putting pressure on the bureaucracy to increase tax collection either by adding new taxpayers in the tax net or by plugging the under-filing by existing taxpayers. It is also an established fact that besides tax evasion, a wide majority of registered taxpayers conceal their actual sales and production thereby paying lower income and sales tax. At import level, the importers clear their goods at very low declared values to avoid multiple import levies.
Normally the tax revenues also register increase if there is higher inflation than previous year and the domestic currency is heavily devalued. Moreover accelerated GDP growth also contributes to higher tax collection. This is termed as a natural growth of taxes. This year, however, the average inflation in the first nine months of this fiscal is lower than the inflation during the corresponding nine months of last fiscal. The rupee has remained stable and the GDP growth is slightly above last year’s level. All these factors do not favour higher tax collection. Still, a growth of 18.2 percent in tax revenue from 1.653 trillion rupees in the first nine months of last fiscal to 1.955 trillion rupees in the same period of this fiscal belies the traditional logic.
Tax collection in Pakistan has a lot to do with the efforts of the tax collectors. The top tax man and the finance minister have to put constant pressure on the tax collectors to achieve realistically unachievable targets. Prudent managers know that the tax collection of previous years is irrelevant and growth in tax collection cannot be based on the actual collection in the previous year. They fix very high tax collection targets. These targets are termed ambitious or unachievable by some economic experts. What they fail to factor in is the fact that the tax evasion in Pakistan is so high that even doubling the tax revenue target is achievable.
The high growth in tax collection during the first nine months of this fiscal is still below the budgetary target but not far off the mark. What is commendable is that a growth of 18.2 percent in tax revenue has been achieved against all odds. This growth in revenues was achieved because the federal finance minister remained in constant liaison with the tax collecting machinery. He might have missed many meetings with the businessmen and other stakeholders, but he never missed his monthly confrontation with the tax machinery.
The addition in tax revenue was not achieved only by squeezing the existent tax payers, but also by nabbing tax evaders and under-fillers. The pressure on tax collectors should be further increased to enhance the tax-to-GDP ratio that hopefully would touch 10 percent of GDP after more than a decade. It is expected that the government would do away with most of the tax exemptions in the next budget that would provide level playing field to those not availing benefits of exemptions.
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