Tax, power sectors need reforms

The International Monetary Fund (IMF) team visiting Pakistan on a Post Project Monitoring (PPM) mission a couple of weeks ago emphasised yet again the need for power and tax sector reforms and expressed scepticism over the continued inability of the government to begin implementing power sector reforms and realise budgeted revenue targets.

The PPM mission is approved by the IMF management for those of its member countries that either suspend an ongoing IMF programme or cause it to be suspended. Pakistan’s 2008 Stand-By Arrangement (SBA) with the Fund was suspended due to the government’s sustained failure to implement the agreed reforms in the power sector and amending the tax structure even after a number of extensions were granted to the implementation timeline by the IMF. Thus the IMF evaluation of what the government is not doing that is impacting on key macroeconomic indicators comes as no surprise.

A look at the specific reforms are in order as whoever wins the next general elections and forms the government would be required to implement these reforms on an immediate basis if the objective is improvement in severely stressed macroeconomic indicators. International donor agencies focus with respect to reforms in the utility sector, which several developing countries including Pakistan heavily subsidise, is to ensure full cost recovery. Unfortunately, however, subsidies are rarely targeted to the vulnerable. Pakistan as a case in point fits the bill perfectly and this state of affairs is not specific to the present government. In 2001, total amount owed to Wapda alone was 36 billion rupees – 26 billion rupees was owed by the four provinces and 10 billion rupees by privately operated Karachi Electric Supply Corporation (KESC). The total receivables have escalated over the past nearly five years. There are billions of rupees of payments owed to power distribution companies by the four provinces (Sindh owing the maximum) and by prominent family members of federal and provincial ministers (agreement with Hina Rabbani Khar’s husband for deferment of a massive amount of unpaid bills comes to mind). This explains why in the recent Council of Common Interest meeting the Prime Minister constituted yet another ministerial committee headed by Finance Minister Hafeez Sheikh, (though he has consistently failed to help evolve a consensus between his more relevant colleagues notably Ahmed Mukhtar and Dr Asim Hussain in the past). But the other member of the committee namely Khurshid Shah’s relevance as the Minister of Religious Affairs to this committee remains a mystery.

Clearing of dues by all sub-sectors operating in the power sector would ease the loadshedding crisis that is less the outcome of generation capacity and more of mounting inter-circular debt (estimated to be in excess of 400 billion rupees). Thus Pakistan State Oil (PSO) is unable to pay for fuel imports given that the distribution companies are owed large sums by public sector and private consumers which in turn compromises their ability to clear the bills of generating companies that are unable to pay for imported fuel compelling them to operate at well below capacity. Not surprisingly, elimination of inter-circular debt was a critical condition that was agreed by the government of Pakistan with the IMF under the SBA. The circular debt accounts for not only heavy subsidies to the power sector relative to what is budgeted (340 billion rupees additional subsidy was released to the sector last year alone) but there has also been no focus on improving the performance of the sector through identified and agreed reforms.

Wapda has been selling from 250MW to 450MW electricity to KESC even during times when its own system was suffering from severe shortages and load shedding. The rates at which Wapda supplies to KESC are not financially viable and therefore there is a need to re-evaluate the tariff. But then rates at which Wapda supplies electricity to its own consumers are also not viable and full cost recovery remains an unfulfilled objective. The present government simply continued the arrangement of supplying around 300 MW to KESC which has upped the political temperature in Punjab with the PML (N) maintaining that this decision was taken by the coalition partners (the PPP and the Karachi/Hyderabad-based MQM) to ‘punish’ Punjab for voting PML (N).

The failure to implement tax reforms has been another area where performance has been appallingly poor. The question that is uppermost in the minds of the general public is which party is responsible for the tax system remaining inequitable, unfair and anomalous? The main responsibility rests with Minister of Finance as the Federal Board of Revenue (FBR) comes under his purview. Why does the FBR not control leakages within its own system (estimated at a whopping 500 billion rupees per annum) or propose taxes that are designed to render the system more equitable? Why does the FBR focus on increasing existing taxes rather than on increasing the ambit of taxes to include other rich tax exempt groups which would include the levy of IMF/World Bank proposed value added tax (VAT)? Incidentally, the MQM as well as PML (N) were severely opposed to VAT as its constituents would have been negatively impacted had this tax been implemented. Why does the FBR formulate amnesty schemes (whose number militates against their insistence that this is the very last one) that are being labelled as the taxation national reconciliation ordinance? It is relevant to note that even the IMF team has expressed reservations over the most recent amnesty scheme?

The FBR passes the buck to the cabinet by maintaining that it is an implementer while it is the Minister of Finance who must select and then present recommendations to the cabinet which is the body that approves the tax proposals before they are incorporated in the budget which is tabled in parliament. The cabinet blames the parliament as many of the taxes that should be levied on influential members of parliament would be shot down, if proposed. Or such is the contention. In short each and every man/woman who is a member of this chain – from the FBR to the MNA – must be held responsible for a tax system that continues to be unfair and anomalous.

Pakistan’s reliance on borrowing from domestic sources has escalated as it has failed to generate budgetary support from international donors due to the suspension of the IMF programme, the Fund’s refusal to extend a letter of comfort enabling the country to access budgetary support from other donors, and its own inability to begin implementing reforms. The government has also failed to generate budgeted non-tax revenue under two counts for the past three years: (i) awarding of the 3G licences due to frequent scrapping of the tender attributed to lack of transparency, and (ii) the refusal of Etisalat to clear the remaining 800 million dollars owed for the sale of PTCL mainly because of government’s inability to meet the terms of the agreement which required the hand over of all properties.

It is imperative that the next government undertakes reforms in these two critical sectors namely power and tax sectors. Unless there is an attempt to ease the power crisis which is the main reason behind a decline in output, increasing relocation of industrial units abroad and consequent unemployment in the country macroeconomic indicators will continue to flounder. In addition a Council of Common Interest meeting must be called on the subject of raising federal and provincial revenues and comparisons with other countries operating within a federal system like India, Australia, etc, to draw parallels must be undertaken.