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Smoke, mirrors and state assets

The Inter-Governmental Commercial Transactions Act, 2022 (the 2022 Act) was enacted last year and has been recently put into effect by granting a concession for certain berths at Karachi Port to a UAE-based joint venture.

The 2022 Act states in the very preamble that it has been enacted to provide a mechanism to carry out commercial transactions under an inter-governmental framework agreement to promote, attract, and encourage foreign states to have economic and business relations with Pakistan.

The important element of the 2022 Act is that it allows the federal government of Pakistan to, among others, sell and grant concessions and other contracts in respect of state-owned assets. The 2022 Act has been enacted in a broad-brush manner with a provision which allows, but does not mandate, the federal government to make rules for carrying out the purpose of the 2022 Act.

While the 2022 Act may prove pivotal for the federal government in the short term to raise finance and establish business relationships with other states, the principles of accountability, fairness, and transparency expected of commercial transactions involving state assets seem to have been overlooked in the 2022 Act.

This is because there are no provisions which mandate the federal government to seek a neutral valuation of the state assets or the rights attached thereto which are the subject of the business agreement under the government-to-government (G2G) framework agreement. There is also no condition to complete due diligence of the relevant state asset (which will allow the federal government greater insight into, among others, the financial health of the relevant state asset). Further, there is no requirement to undertake a cost-benefit analysis of the relevant commercial arrangement with the foreign state (including to analyze whether such transaction under the G2G framework agreement is more beneficial to Pakistan than, where applicable, seeking private sector participation through standard procurement, public private partnership mode, and privatization, or otherwise the continued ownership, control, and/or management by the federal government itself).

If anything, the 2022 Act works against the principles of accountability, fairness, transparency, and due process. This is because not only does the 2022 Act seek to bar the jurisdiction of the courts to entertain proceedings under the 2022 Act (which is contestable), it further seeks to override other applicable laws including the Privatisation Commission Ordinance, 2000, and the Public Procurement Regulatory Authority Ordinance, 2002, and immobilizes established institutions such as the Privatisation Commission and the Public Procurement Regulatory Authority rather than rely on their expertise for transactions falling under the 2022 Act.

The 2022 Act further seeks to provide impunity from inquiry and investigation for commercial transactions falling under the 2022 Act unless there exists evidence of personal monetary gain with corroborative evidence of link between such monetary gain to the undue benefit rendered to any party to the agreement. This is very problematic with an impact which is at least twofold. First, without an inquiry or investigation, evidence of monetary gain and undue benefit does not very often become available or accessible. This will likely give rise to a catch-22 situation where evidence is required to commence inquiry and investigations, but such evidence cannot be gathered unless an inquiry and investigation has in fact taken place.

Second, in a G2G transaction, it is unlikely that the parties — the government-owned entity or the government themselves — will gain personal monetary gain or undue benefit. It is rather the agents and office bearers of the relevant governments or government owned entity who may act in bad faith and gain undue benefit.

The 2022 Act, which technically envisages for the government or government-owned entity to have gained undue benefit rather than the agents and office bearers of the relevant government, fails to realize this aspect. Even then there lies a further bar which prohibits actions to be taken against a person in his personal capacity for actions taken in official capacity, further limiting the scope of proceedings against the agents and office bearers of the federal government.

An even keener aspect of the 2022 Act is the potential ability of specific political persons to rely on the 2022 Act to garner personal support from foreign states. With a lack of safeguards ensuring transparency, fairness, and accountability, there is a possibility that some states may form the impression that certain political persons will be friendlier than others when it comes to investment, which may translate into an intangible undue benefit for those political persons in the form of foreign support.

The flip side of the 2022 Act is equally problematic. This is because the 2022 Act also extends to the purchase and investment by Pakistan in a foreign state, as further evident from the statement of objects and reasons annexed to the bill of the 2022 Act introduced in the National Assembly. Therefore, all the matters considered above from the perspective of investment in Pakistan will apply to an arrangement where the investment is being made by Pakistan, except that one of the issues in such a case will be the potential of an overvaluation of the investment: paying more than the fair value for the investment.

For a country currently ranked at 28/100 of the Corruption Perceptions Index, with 0 being highly corrupt and 100 being very clean, Pakistan is already struggling with its perceived status of a corrupt state amongst other developing countries. Laws such as the 2022 Act are only but a reflection of how little attention is being accorded by the federal government of Pakistan to the perceived level of corruption in the country.

Foreign states will also lack significant comfort in signing on to commercial transactions with Pakistan if there is a perception of lack of fairness, transparency, and accountability that attaches to that transaction. This lack of comfort will then very likely be built into the price which such foreign state is willing to pay against any transactional or investment opportunity that Pakistan is willing to offer them, thus reducing the overall net benefit to Pakistan while at the same time quite possibly adversely affecting the perceived level of corruption in Pakistan.

Even though not stated in the statement of objects and reasons made available at the time the bill was introduced in the National Assembly, it is thought that the 2022 Act is an emanation of the discussions of the federal government of Pakistan with the IMF. The question which this raises is that, even if the law on G2G transactions had to be enacted, whether the 2022 Act had to be made in a manner which seems to trample principles of fairness, transparency, and accountability.

The crux of the matter essentially is that if the principles established under long-established laws on procurement, public-private partnerships, and privatizations were being disregarded in favour of an efficient and efficacious commercial transaction under a G2G framework, then at least some mechanisms such as mandatory valuation, due diligence, and cost-benefit analysis, together with reasonable provisions on accountability and oversight of the transactions, and a right of stakeholders to seek resolve of any of their valid objections, should among others have been incorporated in the 2022 Act.

Email: warda.tahir@yahoo.com

Warda Tahir, "Smoke, mirrors and state assets," The News. 2023-07-06.
Keywords: Political science , Political issues , Political persons , Corruption , Accountability , Pakistan , IMF