The private sector versus public sector debate is a historic one and often termed as Keynesian versus neo-liberal thoughts or control versus deregulation. Where both schools of thought however agree, is on efficient allocation of resources to produce only marketable goods – meaning keeping an eye on competitiveness. Modern management has added a new dimension to this often intense and perhaps occasionally controversial debate by; a) providing the ideal modern day management solutions and b) by seeking the right mix between the private sector domain and the footprint of the state – a market economy governed by Codes of Corporate Governance.
In the context of Pakistan in general and Punjab in particular, the very fact that we are even talking about having such a debate in itself establishes that there is a problem on hand and a private-public dialogue is required like never before. And with Punjab being the most industrialised province of the country, the problem naturally stands compounded in it.
Pakistan’s competitiveness stands eroded and as a result its manufacturing industry is getting dismantled or its industrial economy is getting de-industrialised. With 2 million fresh young people becoming employable every year this clearly presents a serious problem, the signs being:
1) Share of manufacturing in GDP is declining: Down to 13% today from nearly 19% in 2007-08. Dissect it further and we see that the 13% was the level way back in 1985-87, but then it was on an ascending trajectory. Today the decline represents a shrinking industrial sector, meaning all that was achieved in industrialisation in the first 40 years of our birth has been lost over the last decade.
2) Private sector credit as a percentage of GDP is down to 15% (last recorded in 2015) from 29% in 2005. Also, it happens to be the lowest in the region.
3) Cost disparities - vis-a-vis region and the global market-place – which have increased overtime and are still increasing. These can mainly be attributed to mis-governance and poor policy frameworks, both at federal and provincial levels.
4) Excessive oversight is yet another problem: For example, in an ease-of-doing-business survey conducted for the KCCI, the likelihood of a firm in Pakistan to be picked up for a sales tax adjustment/refund audit over a period spanning 5 years is more than 50% as against being under 10% in Bangladesh and under 1% in the UK (in their VAT filings). And by the way, Bangladesh despite emerging as the fastest growing economy in South Asia, has just announced an ambitious plan to address ease of doing business issues in the country in order to break into the top 50 of this index by 2022.
Punjab’s story in this regard has been the worst: An expanding footprint of the public sector with total disregard to the codes of corporate governance. Ad hoc decision-making resulting in non-transparent investments at the cost of tax-
payers. Naturally, the fall out of excessiveness, wastefulness and inefficiency has come about in the shape of erosion of the documented business sector. With the natural or the professional approach to project-investment found missing, big projects (mostly not self-sustainable) have been implemented without due care taken on operational deficits. Only later to be followed by coercive and counterproductive tax drives to raise revenues in order to subsidise them and to maintain them as ongoing concerns. PRA (Punjab Revenue Authority) seems to have totally lost the plot by raising cost of doing business in Punjab through excessive taxation (higher slabs even when compared on an inter-provincial level) to an extent where investment is shying away from the province. Examples: Two Punjab based FMCG (Fast Moving Consumer Goods) companies recently decided to instead expand in Sindh and only last month, a Punjab based cement company also chose KPK (Khyber Pakhtunkhwa) over its home base, Punjab, to set up a new production facility.
Excessive oversight cum regulation: For industries in Punjab, nearly 60/70 departmental dealings per annum with an average of 6 to 8 visits per month of some official or the other. Even signboards are taxed!
Environment, Minimum Wage, and Food Standards policies in many ways are populist instead of being practical. And all these being mostly overseen by unqualified, incompetent or corrupt staff.
Result: Not a single new industrial cluster in the past decade in Punjab to boast about. On the contrary the old SME clusters of Punjab have been wiped out: power looms in Faisalabad and Jhang; hand looms in Multan; cycles, and lights and fixtures on the outskirts of Lahore; injection-moulding and electric fixtures in Gujranwala; sanitary products and fittings in Rawalpindi; the list is endless. And now the next big ticket industrial cluster under threat: Textile spinning from Shahdara to Sheikhupura to Bhikki to Nankana Sahib to Manawala to Shahkot to Khurrianwala to Faisalabad to Jhang.
Solutions (both at federal and
1) A clear mindset on who are the real movers and shakers of the economy.
2) Public sector investment should not come sans a corporate governance structure.
3) Taxing the already taxed is only a short-term solution to meet deficit targets.
4) Avoid knee-jerk taxation endeavours for example super tax; tax on reserves; tax on bonus shares; tax on inter-corporate dividends; luxury house tax; double taxation between centre and provinces and inter-province.
5) Lower tax slabs in accordance with regional or global competitors’ benchmarks: Both corporate income tax and sales tax.
6) Level the playing field between the formal and informal sectors.
7) Curb smuggling in any form: outright or mis-declaration or under invoicing.
8) Harmonise inter-provincial and federal/provincial taxation and product standards.
9) Curb FBR’s discretionary powers and also those of the PRA in Punjab.
10) Industrial one window compliance mechanism and distancing the tax collector from the taxpayer in letter and spirit.