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January 9, 2019

Fiscal deficit management — the ‘big five’ theory

Top Story

January 9, 2019

Unlike external account, fiscal management remains in the hands of the government. There’re two main components of fiscal account — taxation involving Federal Board of Revenue (FBR) and non-tax Public Sector Entities (PSEs). Both these components doesn't require any external support and assistance, as such, and it could all be handled with the political-will and the right policy actions by the government.

That’s where the theory of “Big Five” comes handy, whereby the idea is that “top five regulators” and “top five PSEs” shall be made independent and eventually reformed. This will help in addressing the fiscal deficit to a very large extent, and perhaps completely over a period of time.

There are about 18 regulatory bodies in the country: the State Bank of Pakistan (SBP), the Securities and Exchange Commission of Pakistan (SECP), the FBR, the Competition Commission of Pakistan, the Pakistan Electronic Media Regulatory Authority (PEMRA), the National Electric Power Regulatory Authority (NEPRA), the Oil and Gas Regulatory Authority (OGRA), the Drug Regulatory Authority, the Civil Aviation Authority (CAA), the Pakistan Telecom Authority, the Pakistan Nuclear Regulatory Authority, the Pakistan Standards and Quality Control Authority, the Public Procurement Regulatory Authority, the Private Education Regulatory Authority, the Pakistan Medical and Dental Council, the Pakistan Engineering Council, the Pakistan Nursing Council, the Pakistan Tibb Council, the Pakistan Veterinary Medical Council and the Pakistan Environmental Protection Agency. Besides, there are prime regulators such as the Election Commission of Pakistan, the National Accountability Bureau, and others.

The big five regulators which are identified for the purpose of this thesis are SBP, SECP, NEPRA, OGRA, and FBR. While there are other very important regulators as well like PEMRA, CAA, etc.; however, the top five listed regulators selected for the purposes of this thesis based on two main criteria — one: impact on the fiscal deficit; and two: direct impact on business in Pakistan. For efficient reforms and even for privatization, independent and effective regulators are a pre-requisite. Privatization without strong and empowered regulator maybe harmful than help for the overall economic impact and progress stand-point.

On the other hand, there’re 193 PSEs. The big five identified for this purposed are: Pakistan International Airlines (PIA), Pakistan Railways, Water & Power Development Authority (WAPDA), National Transmission & Distribution Company (NTDC), and Oil & Gas Development Company Limited (OGDCL). These entities have been shortlisted based on three arguments — first: optimal exploitation of natural resources (water, gas, etc.) and import substitution; second: impact on logistics as that seems to be the biggest chocking point in the overall scheme of things in terms of smooth business operations & growth and must be addressed on priority; and third: impact on fiscal account. Pakistan Steel is not included in the list as this business shall be promoted in the private sector, in any case.

Since FBR has the role of both of a regulator/ policy-maker and a collection agency, in other words a sort of PSE, with the agenda of revenue collection with incentive plan; and hence, it could have fallen in the jurisdiction either as a regulator or a PSE. However, in the strictest scene of the word, it’s considered as a regulator and therefore, in this thesis this is included in the list of regulators only.

The taxation piece of the fiscal account require structural reforms which are already underway. The fundamental reason for taxation issues emanates from the fact that the whole taxation regime has become too complicated and there’s an element of increased intimidation by the taxmen towards the genuine tax payers. Harassment is the single biggest hurdle that keep people from paying taxes. This is, therefore, imperative that the interaction between the taxmen and the taxpayer is reduced to the minimal. This is possible through: i) use of technology; ii) flat tax regime, particularly in customs; and iii) substantial reduction in direct taxes. The other factor being the lack of trust on the government to judiciously use the tax collected from masses; in other words, the element of corruption and leakage in the system. This could merely be addressed with the better governance over a period of time. Making taxation system simpler and eliminating the interaction with the taxman alone will help in enhancing the taxation collection. This objective could be achieved through some policy changes and with the use of technology. Whilst FBR has come a long way on the technology front; however, this area still require reforms and professionals engagement. There will be a considerable resistance to this change, for obvious reasons; therefore, strong political and institutional commitment is a prerequisite as the reforms are absolutely inevitable in FBR.

As part of the restructuring of FBR, the government has already announced to divide the FBR structure between “policy” and “collection”. This distinction will address any existing, and potential, conflict of interest. This will also help in better engagement of the policy-makers with the various stakeholders in the industry/ market to come-up with business-friendly taxation policies. On the other hand, the collection team will focus on the enhancement in collection alone without tinkering with the taxations policies to achieve the collection targets. Currently, the FBR policy-makers are on their way to introduce policies that allow for easy ways of revenue collection, including increasing general sales tax rates and concentration of withholding taxes in the revenue policy. However, these steps were putting excessive burden on existing tax payers and hence could encouraging tax evasion. With the above contemplated reforms, this is expected that the tax base will increase and the taxations policies will be rationalized for even tax burden across.

On the non-taxation front, the government has taken an initiative to set up 'Sarmaya Pakistan' to revive the loss-making entities and make the profitable ones more efficient and profitable. The most critical aspect and objective of Sarmaya Pakistan is to get these supposed to be “for-profit” entities out of the administrative control of various ministries and exposed them to the professional management with the requisite sectoral expertise. This would require “best of the best” talent from the market, at market-based compensation, for this conceived to be the most important entity of the Country, to be run on the most professional lines, and so as the entities under the administrative control of Sarmaya Pakistan. While Sarmaya Pakistan will take some time to be adequately and appropriately resourced and operational, in the meantime, it may be a good idea to focus on the big five PSEs to be restructured.

The performance of the PSEs has deteriorated over the past many years because of a host of factors, particularly the lack of relevant skills and expertise in the administrative ministries and divisions for guiding and helping companies to perform in a professional and competitive way.

The government shall select the best professionals to run these entities, both regulators and PSEs, empower the professionals and their Boards to run them without administrative interference from the relevant ministries. The oversight and control of the companies may be given to the professionals having extensive experience and expertise, contrary to the current practice where the administrative ministries and divisions have extensive control of the companies. The Board of the big fives must be headed-up by the best professionals from the private sector while the majority of the board will be pre-dominantly private sector to ensure almost no, or at least minimal, involvement of the public sector influence while the overall government policy is appreciated and followed. The private sector representatives shall not be less than 75% of the board to ensure super-majority in independent decision-making. The selection of the private sector board members will be the key in the process. The cabinet have to put the process in-place for apolitical and professional selection/appointment of the board members, and that aspect, along with the selection of the CEO and the other management members, will guarantee the ultimate success for the government in addressing the fiscal deficit.

(The writer is a freelance consultant; former director-general of National Savings, board member of the State Bank of Pakistan and Monetary Policy Committee; and former Regional MD Barclays Southern Africa)

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