Saturday May 18, 2024

A privatized shift

By Dr Zia Ullah Ranjah
February 21, 2023

Considering Pakistan’s economic hardships and the unavoidable IMF’s conditions, privatization of public assets should be expedited to boost the economy. This will foster domestic and international investments and promote competition. However, to achieve these goals, the government must provide a clear policy framework for investment in the public sector and the privatization of state-owned enterprises (SOEs).

Successive governments have been pursuing privatization as a vehicle for economic reforms. Pakistan started the privatization of SOEs in 1991 to promote deregulation and economic liberalization. This programme was designed to improve the GDP growth of the economy, and as a reversal of the nationalization programme launched in the 1970s. It raised Rs476 billion from a total of 167 privatization transactions between 1991 and 2008. These transactions comprised mainly the privatization in the industrial, telecom, and financial sectors.

The privatization programme suffered a serious setback by the Supreme Court of Pakistan decision in 2006 in the Pakistan Steel Mills case on the grounds of corruption and illegality. In 2013, the PML-N government resumed the privatization programme, and between 2013 and 2018, the government privatized various public-sector entities such as banks and power-sector entities, fetching the proceeds of Rs173 billion.

In 2018, the government formulated a new privatization programme, focusing on short-, medium- and long-term plans. To realize this plan, however, a robust framework is needed, which should be aimed at removing obstructive legislation in Pakistan. In this regard, for example, the government has promulgated the Foreign Investment (Promotion and Protection) Act, 2022 (Act) “to attract, encourage, and protect, large scale foreign investment into Pakistan and to ensure sustainable economic activity and growth.”

The act provides investment incentives including exemption from the operation of the application of any provisions of any law, regulation, rule, ordinance or other similar instruments. Section 2(n) of the Act defines ‘Protected Benefit’ as “the Investment Incentives provided to investors and/or Qualified Investments through legislative amendments contained in the Second Schedule of this Act as well as all Investments Incentives listed in the Third Schedule of this Act.” According to Section 2(r), “Qualified Investment means the investments, sectors, industries or projects as may be chosen, approved and duly notified by the Federal Government as a Qualified Investment in the First Schedule of this Act.”

As per Section 2(k) of the act, the investment incentive includes exemption from any federal or provincial or local charges, cesses, duties, fees, levies, taxes or tolls payable under any law; a licence or lease or permit or permission granted or conferred by concerned government; grant or renewal of work permits; licenses, approvals, no objections, consents, permissions, or permits for the remittance to or repatriation of foreign exchange from or into Pakistan, etc.

The act authorizes the federal government to choose, approve and notify any investments, sectors, industries or projects as qualified investments encouraging investment by providing various investment incentives. To attract foreign investment in the Reko Diq project, for instance, the act makes significant amendments to the local laws.

These amendments include changes in the Income Tax Ordinance, 2001 regarding the final tax regime (time-limited exemption and rate stabilization); dividend income and withholding tax thereon for shareholders (time-limited exemption and rate stabilization); capital gains tax (conditional exemption and rate stabilization); withholding tax on shareholder loan investment and shareholder income (time limited exemption and rate stabilization); withholding tax on third party interest and third party income (conditional exemption); thin capitalization (stabilization of existing requirements); withholding tax on goods and services (time-limited exemption and rate stabilization); certain transaction taxes (exemption); advance tax on imports (exemption); tax depreciation (stabilization); and anti-avoidance (exemption). Further amendments are made to the Sales Tax Act, 1990, the Privatization Commission Ordinance, 2000, the Workers Welfare Ordinance, 1971, the Customs Act, 1969, and Federal Excise Act, 2005, etc.

Likewise, certain incentives in terms of duties, taxes, fee, etc can be provided to attract local investors to augment privatization. Specific facilities may also be granted through upgrading the legal framework aiming to provide, for example, a one-window solution for investment-related issues and a neutral and efficient forum for dispute resolution.

At the same time, while attracting foreign and local investment to push privatization, effective measures should be taken to safeguard the interests of consumers by formulating a regulatory framework before divestiture, avoiding the concentration of economic power in a few hands. Further, given rising unemployment in Pakistan, labour organizations and employees’ unions should be taken on board to adopt a balanced approach to investment, privatization, and employment. The public perception regarding corruption and favoritism in the privatization of public assets must be addressed.

The privatization programme cannot succeed without the support of all stakeholders, including government institutions, organizations, regulatory authorities, and above all, the people of Pakistan. Any investment and privatization policy will be welcomed when there is merit, transparency and a fair distribution of opportunities and resources for people. In any case, such policies must promote both the economy and the independence and security of national institutions.

The writer is an advocate of the Supreme Court.