Feisal Naqvi

Archive for November, 2016|Monthly archive page

GOVERNMENT REGULATION AND PRIVATE ENTERPRISE

In Uncategorized on November 5, 2016 at 4:44 am

 

Introduction

 

Western travelers to the Moghul empire often noted that the fundamental relationship between the state and the subject (especially the prosperous subject) was adversarial. According to one observer at the Emperor Jehangir’s court, “There are very many private men in cities and towns . . . that are very rich: but it is not safe for them that are so, so to appear, lest that they should be used as fill’d sponges.” Another writer noted that, it was “not safe for [rich merchants] so to appear . . . for should the Mughal’s Officers see the Chests and Bags of Gold carried as publicly here, as they are in the Streets of London, they would be apt to change their Owner, and be deliver’d to him who calls himself the Original Proprietor.”[1]

 

It is important to examine the origins of Pakistan’s legal framework because laws are only a means to social ends. Furthermore, since law-making in Pakistan has historically tended to consist almost entirely of incremental and minor changes, many of the laws affecting private enterprise are still laws originally created by regimes which were either hostile or indifferent to private enterprise. If those laws are applied today without any consideration for the circumstances of their creation or the ethos embedded in them, they will continue to produce the results for which they were originally intended – and not the results currently desired.

 

For example, the days of the Mughals may appear to be long gone but the assumption that the Government is the ‘original proprietor’ of all wealth still lingers in the ranks of bureaucracy. More importantly, the laws of the Mughal also linger on in the form of the current system of land records which has hardly changed since it was created by the East India Company in the late 18th century by formalizing the land revenue system set up in the 16th century by the Emperor Akbar. In fact, the records of the land revenue system still serve in Pakistan as the primary land records even though the land revenue tax itself was abolished in 1977.

 

To take a more recent example than the land laws, the current regulatory framework relating to labour and employment issues consists of 161 laws, rules and regulations, many of which date back to the 1960s and 1970s when private enterprise was regarded with considerable suspicion, nationalization was the order of the day and Article 3 of the Constitution was drafted to provide that “The State shall ensure . . . the gradual fulfillment of the fundamental principle, from each according to his ability, to each according to his work.”

 

Given the multiple burdens of the past, one is tempted to describe private enterprise in Pakistan using Dr. Johnson’s quip about a dog walking on its hind legs: “it is not done well; but you are surprised to find it done at all.”[2] However, that analysis is no longer entirely appropriate. Currently, Pakistan is in the middle of a regulatory revolution, a paradigm shift in which the legal structures of the past are not only being refurbished but being reexamined and revised. In some cases, the reform is superficial. In some cases, the reform is fundamental. But, in almost all cases, there is a transition – or at least the beginning of a transition – towards a mode of administration in which the state and private enterprise are no longer adversaries but partners in economic growth.

 

Legal Framework

 

According to the World Bank’s latest report, “Pakistan ranks relatively well in starting a business – both globally and regionally.”[3] According to the time frames mandated by the Securities and Exchange Commission of Pakistan (SECP), it should be possible to register a new company in four days.[4] However, independent estimates of the time needed to start up a company range from 24 days[5] to 13 days,[6] which though not great is at least significantly less time than the four months required in the 1990s. In any event, it is readily apparent that the formation of a company is no longer a significant hurdle for private entrepreneurs. Instead, the problem lies in the attributes of that company after it has been formed.

 

Corporations are deemed to be good for business for the simple reason that they limit the liability of their shareholders. Even if a company goes bankrupt, the most that a shareholder will lose is the value of his shares but he will not be liable in his personal capacity, like a member of Lloyds, “down to the last cufflink.” Companies are also good for business because they provide a structured way for people who may be complete strangers to cooperate and put their capital (both financial and intellectual) into productive use.  In other words, a shareholder can invest with confidence in the shares of a publicly traded company because he trusts that the relevant regulatory framework will force the management of the company to respect his rights.

 

The two most important goals for a corporate regulatory framework then are to ensure that corporations enjoy limited liability and to further ensure that corporate management respects the division between their own assets and the companies’ assets. On both accounts, Pakistan’s corporate regulatory framework needs work.

 

Admittedly, the limited liability of companies is never absolute. In practically all countries, the corporate shell does not protect against criminal charges or when the corporate form is being used to defraud. However, Pakistan’s laws go much further.

 

The single most important factor affecting limited liability of corporations is the demand by all banks for personal guarantees of the directors of the banks.  Till recently, this demand was non-negotiable because the prudential regulations issued by the State Bank of Pakistan mandated that banks obtain personal guarantees from all directors of private limited companies.[7] In 2003, the SBP changed its prudential regulations to allow banks to formulate their own policies with respect to personal guarantees.[8] However, this “relaxation” has yet to have any beneficial effect as all banks, practically without exception, still demand personal guarantees from all directors of private limited companies before giving any loans. Since Pakistan’s banking sector is now quite competitive, the continued demand for personal guarantees cannot simply be ascribed to bureaucratic inertia. Instead, the demand for personal guarantees continues till date because the banks have limited faith in their ability to recover loan amounts through the sale of pledged collateral.

 

The most blatant exception to the principle of limited corporate liability comes from the criminal law, and specifically the National Accountability Bureau (NAB) Ordinance, 1999. Section 5(r) of the NAB Ordinance provides that “willful default” of a loan by a company to any entity or bank as a crime for which every director and controlling shareholder of a company can be held liable and punished with 14 years imprisonment. Furthermore, the term “willful default” was specifically clarified in 2000 to mean “any default” of more than 30 days,[9] in other words turning civil default into a strict liability crime!

 

The NAB law was one of the showpieces of General Musharraf’s regime in its early days and was based upon the simplistic assumption that defaulting businessmen were all shysters who would shell out the “stolen” amounts if treated with sufficient severity. Given the prevalence of bad loans in Pakistan’s banking sector in 1999, the anger which produced the law was understandable but the law itself was a disaster. As a consequence, the government was forced to retreat and introduce a provision that prosecution on willful default grounds could only take place with the approval of a committee created by the State Bank of Pakistan.[10] That committee has essentially stopped all fresh prosecutions on willful default grounds since 2002 but the NAB law still casts a long shadow over businessmen.

 

The point being made here is simple: business involves risk. More specifically, entrepreneurship involves risk. Criminalising the non-payment of a loan means criminalizing the taking of risks, which certainly operates as a disincentive to starting a new business. How many innovations would Silicon Valley produce if all those who failed in their endeavours faced the prospect of 14 years in jail?

 

Even apart from the well-publicised flaws of the NAB law, the government bureaucracy – and certainly the policy making parts – has yet to fully understand the benefits of limited corporate liability. For example, the Income Tax Ordinance, 2001 still provides that all directors of a company are liable in their personal capacity for all defaults of the Company. [11] Furthermore, even when the law itself contains no specific provisions, state entities often use indirect means to pressure directors and shareholders for the alleged defaults of the company. In one case, for example, a former employee of a company was placed on the Exit Control List (and thereby barred from leaving Pakistan) on the grounds that his former employer had defaulted in payment of excise tax, even though the Central Excises Act, 1944 contained no provision placing individual liability on directors of companies (let alone employees). Even today, the website of the Employees Old Age Benefit Institution states that one of the mechanisms being considered by the government to improve compliance with EOBI laws is to make directors personally liable for defaults of the company.[12]

 

The issue of limited liability is one which strikes at the heart of corporate regulation. If companies do not enjoy limited liability – and if shareholders and directors do not enjoy some degree of protection from ordinary business risk, they will remain reluctant to involve themselves in business. At present, the risk associated with corporations means that many people who are not normally engaged in business often refuse to become directors in any company while people who are engaged in business refuse to become directors in companies that they do not control. In each case, the end result for the corporate sector is a loss of capital – both intellectual and financial.

The current status of labour regulations presents in a concentrated fashion all that is wrong with the regulatory environment in Pakistan.

 

The current universe of labour regulations consist of a stratified mountain of over 161 laws and regulations in which the earliest layer dates back to the early years of the twentieth century (such as the Mines Act, 1923), the middle layer consists of laws added during Pakistan’s romance with socialism during the 1960s and 1970s, and the final layer consists of random bits and pieces of legislation haphazardly tacked on during the last two decades.

 

The ad hoc construction of this edifice means that coverage of areas tends to be spotty. Thus while some issues (such as minimum wage) are massively over-regulated, some issues are ignored. For example, there is no general law dealing with occupational safety: instead there are only stray provisions contained in the Factories Act, 1934 and the Mines Act, 1923.

 

The problem created by a plethora of legislation is then further compounded by the fact that, under the Constitution of Pakistan, responsibility for labour legislation is shared by both the federal and the provincial governments. There are therefore multiple authorities simultaneously applying, enforcing and administering multiple legal regimes. The Federal Government, for example, is responsible for collecting benefits under the Employees Old Age Benefit Act, 1976 and the Companies Profit (Workers Participation) Act, 1968 while the provincial governments are responsible for implementing the Provincial Employees Social Security Ordinance, 1965, the minimum wage laws and the Workers Welfare Fund Ordinance, 1971.

 

More importantly, the multiple burdens imposed by the plethora of existing laws add up quickly: employers in Pakistan pay 13% of the salary of qualifying employees as benefits along with 7% of their profits.[13] Furthermore, employers have to file multiple returns with multiple regulators even though the information provided in each case is essentially identical. On the other side, workers seeking benefits have to approach multiple regulators to obtain benefits.

 

The final piece of the puzzle is that the vast majority of the regulatory framework is extremely intrusive and decidedly optimistic about the desire and ability of employers to make payments to the government (as opposed to bribing the relevant labour inspectors). The best example of the over-intrusive nature of labour legislation is the minimum wage notification issued by the different provincial governments.  Instead of simply specifying a minimum wage for unskilled labour, the latest notification issued by the Punjab Government specifies minimum wages for 7185 different classes of workers in 51 different industries, with many of the prescribed wages differing only by a few rupees.[14] Similarly, the cost of terminating a worker is prohibitively expensive with an employer having to pay 90 weeks in severance, penalties and notices to terminate a worker.[15]  The cost of terminating an employee is important because those costs are not payable if an employee is discharged for misconduct. The labour system therefore gives employers a positive incentive to fire their employees on trumped up charges which in turn means that the labour courts are full of cases in which the grounds of termination are under challenge. Not surprisingly, Pakistan ranks extremely low on a comparative basis both in terms of flexibility in hiring and firing as well as in cost of hiring and firing.[16]

The net result of all this is that the current labour system fails comprehensively on practically all counts. From the employer’s perspective, the labour laws represent a giant and extremely expensive headache, one which is best avoided by keeping workers off the books and farming out work to sub-contractors or by bribing the labour inspectors (or both).[17] Because most employers choose to evade the laws and not register their employees, many workers get no benefits and no job security whatsoever.

 

From the employee’s perspective, the results are equally disheartening. To begin with, the high cost of compliance means that employers prefer not to create jobs but to try and make do with their existing labour force. Secondly, to the extent jobs are created, employers prefer not to create permanent jobs but to contract those jobs out. As a consequence, temporary and unregistered workers remain at the mercy of the market and bereft of benefits. Furthermore, because employers are reluctant to create permanent workers they are equally unwilling to invest in worker training. And finally, because the cost of compliance is perceived as excessive by the business community, employers tend to fight back against unionization, preferring either to create a docile “pocket union” composed of favoured employees or else using strong-arm tactics to ensure that unions do not get formed.

 

The only bit of good news in all of this is that the government at least seems to have realized that the system has broken down and that it needs to be fixed. Following the report of a task force, the government adopted a new Labour Policy in 2002, incidentally the first labour policy since 1972, which begins with the sobering observation that “The traditional environment of mutual antagonism and mistrust between employers and labour has adversely affected

investment, business profitability and growth, all of which are crucial elements for ensuring security of employment, decent wages and social security for the labour sector.” [18] In consonance with the new labour policy, the government has embarked on an ambitious task of reformation and consolidation of labour regulation whereby the existing universe of labour laws is to be consolidated into five laws. The first of these laws, the Industrial Relations Ordinance,  was introduced in 2002 while the consultative process has been completed with respect to a second law, the Employment and Service Conditions Bill.

 

The regulation of real property is the single biggest and most important regulatory challenge confronting Pakistan today. Simply defined, capitalism consists of the belief that the most efficient use of capital arises when individuals are given the maximum freedom to decide how to use their capital.   If that is assumed (repeat, assumed) to be true, it follows that the state has a vested interest in ensuring that transfers of capital are made as secure, as quick and as efficient as possible. Since the primary form of wealth in Pakistan consists of real property, the state of Pakistan has a vested interest in ensuring that property transactions are as secure, as quick and as efficient as possible.

 

Given this objective, it can be readily seen that the regulation of real property in Pakistan is a miserable failure: every single possible transaction regarding real property in Pakistan is highly insecure, grossly inefficient and so unnecessarily encumbered by litigation and the threat of litigation as to be completely dysfunctional.

 

The fundamental problem with land regulation in Pakistan is that there is no system of recorded title in the country. The basic land records maintained by the provincial governments are not records of title and do not record definitively who is the owner of a particular piece of property. Instead, the basic land records in Pakistan are land revenue records, i.e. records of who is liable to tax on the property in question to the state. A person who is recorded as the owner of a particular property in the land revenue records is entitled to present those records as “prima facie evidence” of his title but a court may still decide that the property actually belongs to someone else.

 

In historical terms, the current system of land revenue records was first developed between 1571-82 by Raja Todar Mal, the famous finance minister of Akbar the Great. Subsequently, when the British East India Company conquered Bengal in 1757, it simply stepped into the shoes of the earlier ruler and continued the land revenue system as it provided the single largest source of revenue to the Company.[19] From then onwards, while the East India Company (and later the British empire) was to effect innumerable improvements, the fundamental nature of the land revenue system never changed. [20] Land revenue funds remained at all times one of the leading sources of income for the British and when Independence arrived in 1947, the system inherited by the new country of Pakistan was still recognisably the same system set up by Todar Mal in the 16th century, though of course it had been bureaucratized and organized with the utmost care by the British. Today, sixty years after independence, land revenue records in Pakistan are still maintained and kept in exactly the same manner as they were in 1947 even though the land revenue tax itself was abolished in 1977.

 

The fact that land records in Pakistan consist primarily of land revenue records is extremely important. Whereas the right to own property has been described as fundamental and indeed foundational by philosophers such as Locke, there was no equivalent right of “ownership” of real property in the Indian subcontinent. Instead, all land belonged to the king and the only right recognised by the king was the right of the occupier of that land to continue to occupy it, albeit only upon payment of a fee to the king. As explained by the 1899 edition of the Punjab Settlement Manual, “the share of the State which we call the land revenue is not a land tax. It is more analogous to rent.”[21]

 

More importantly, because the interest of the state historically consisted in identifying the person liable for payment of the ‘rent’ to the state, the fact that the system did not record title, or was only an imperfect proxy for title, was of minimal consequence to the state. Instead, because the right of possession was a consequence of the right to pay tax, the system placed an incentive on the private claimants to land to make sure that their title was recognised. However, there was no corresponding incentive for the state to definitively settle title disputes because the state continued to receive revenue pending the resolution of the title dispute.

 

The problems created by the absence of recorded title are further compounded by a number of factors. For example, Pakistani law recognises the concept of oral gifts. Thus, even though the land revenue records may show a person as the owner of a particular property, it may well be the case that another person holds title to that property because the property in question was orally gifted to him. Since oral gifts are ‘oral’, there is no way that any system of records can account for them.  Furthermore, since oral gifts are invariably disputed by the party being dispossessed, they also result in litigation.

 

A second complicating factor is that Pakistani common law recognises the concept of benami ownership. Benami literally means “without name” but in practical terms means a situation where the ostensible owner of a property is actually holding the property in trust for a beneficial owner. Since benami ownership is not recorded, land revenue records are incomplete to that extent. It may be noted that the identical problem used to be found in India till the Indian Parliament enacted the Benami Transactions (Prohibition) Act in 1988. In 2000, a draft benami law was prepared in Pakistan by the Government of the Punjab but never enacted. Subsequently, newspaper reports have appeared from time to time suggesting that a benami law is being prepared but to no effect.[22] In the meantime, the right of a beneficial owner to file suit against the ostensible owner of property continues to form the basis for litigation.

 

A third set of complicating factors is created by the Islamic law of inheritance. Under the Islamic law of inheritance, testamentary rights are limited to one-third of the estate. Instead, Islamic law provides that property held by a person devolves immediately upon his death in prescribed shares onto his legal heirs. Since there is no process of probate, the right of a legal heir to his or her share of property overrides all records to the contrary. Even to the extent that all the heirs of a particular landowner are recorded, ownership splinters within a few generations into smaller and smaller portions. For example, if a person has three equal and distinct parcels of land, and three sons, his three sons will each inherit an equal share in each property (rather than getting one property each). The ultimate result is that a multitude of individuals ends up owning very small shares in multiple properties.[23] However, when property is held in common, it becomes increasingly difficult to handle because each and every co-owner must agree to the disposal of the land.  If the co-owners cannot agree, as is often the case, the only solution is formal partition proceedings filed in a court of law, that is, yet more litigation.

 

One method which is increasingly used by parties to deal with the plethora of land-holders is to use powers of attorney. However, a power of attorney does not need to be registered in the locality where the land is situated. As a consequence, multiple powers of attorney can be registered for the same piece of land. In fact, as explained by one report, the entire system of registration is a misnomer:

 

Pakistani law does not view registration or any other record of rights in land as a guarantee from the government or its agencies that the person mentioned in the records of any agency is the rightful owner . . . . In transactions involving property transfers, the documents of ‘title’ provided by the seller to the buyer do not certify title. These are private documents that confirm one of the transactions in the entire chain of transactions. . . . . According to Rule 135 of the Registration Rules, 1929, it is not the concern of the Registrar to establish the validity of a document. In fact, he cannot even refuse to register a document on the grounds that it is a fraudulent transaction . . . . Not only is the Registration Office not supposed to go into questions of title, the legality of transactions and the validity of the document it is expressly forbidden by law to concern itself with these issues.[24]

 

Yet another factor which complicates the sale and purchase of land is that some provinces in Pakistan have enacted laws creating a right of pre-emption in certain instances. Under the Punjab Pre-Emption Act, 1991, the neighbour of a person selling agricultural land has a pre-emptive right to purchase the land, i.e. a right of first refusal. Since the right of pre-emption is regarded as a predatory right and consequently disfavored, the exercise of the right is subject to a number of stringent conditions. However, whether or not these conditions have been met can only be settled through litigation. Furthermore, the reason why the right of pre-emption creates problems is because land transfers are almost invariably under-reported in value so as to avoid taxes. If the declared sale price of the land is actually a lot less than the actual sale price (which is normally the case), the prospective seller clearly has much to lose from the exercise of the pre-emptive right of purchase (and conversely, the holder of the pre-emptive right has much to gain). Not surprisingly, litigation flourishes.

 

A final factor which exacerbates the situation (and provokes litigation)  is that while §54 of the Transfer of Property Act, 1882 provides that provides that no document creating any interest in land shall have any effect unless registered, §53-A of the Transfer of Property Act carves out an express exception for an agreement to sell. An agreement to sell does not confer title but it does give rise to a right of specific performance. In short, a buyer under an agreement to sell can file a suit to compel the seller to execute a sale deed with him even though the agreement between the parties is unregistered.  Since unregistered documents are relatively easy to forge, agreements to sell are the basis of considerable litigation.

 

Unfortunately, agreements to sell result in litigation even when not forged because normally land sales in Pakistan are made in stages. At the first stage, the prospective buyer will submit a token payment and in return obtain copies of the relevant documents for due diligence. If the documents are acceptable, the buyer then signs an agreement to sell and makes payment of a further amount, normally ranging between 20%-40% of the total price. The remainder of the purchase price is then due upon the signing of a sale deed and the handing over of possession, which typically occurs 3 months later. However, if the payment is delayed, then the agreement to sell may or may not be valid (depending upon the amount of delay and the language of the agreement to sell). Furthermore, if the price of the property has risen in the interim period, the seller may wish to refuse to accept payment and then lay the blame on the buyer. Either way, litigation often ensues.

 

The end result of all these complicating factors is a system tailor-made to produce litigation. According to some measures, disputes over property account, by some measures, for as much as 90% of pending civil litigation. Furthermore, the volume of litigation generated by property disputes is so huge as to completely overwhelm the judicial system. A study conducted for the ADB, for example, found that the average time period taken for a civil dispute to be adjudicated in the Sindh High Court (excluding appeals) was 118 months.[25] One consequence of this endemic delay is that many property cases are filed not in order to seek ultimate relief but for “strategic reasons,” i.e. to obtain interim relief in order to get the opposing party to negotiate on preferential terms. Furthermore, the fact that the system is clogged with property disputes means that even non-property disputes (such as breach of contract cases) take unconscionably long to adjudicate.

 

The uncertainty of title directly affects private enterprise in a number of ways. Most importantly, the fact that title to property is almost invariably riddled with flaws means that the value of real property as collateral is compromised.[26] Pakistani banks, for example, are reluctant to advance more than 50% of the assessed value of property even though in other countries with more robust systems of title, it is not unusual for financial institutions to lend as 90% (or more) of the value of a property. That 40% differential (between 90% and 50%) is dead value, a burden imposed upon the people of Pakistan imposed directly by a dysfunctional system of property regulation. This point needs to be kept in mind while examining surveys dealing with the amount of time it takes to register a property interest. If the interest which is secured is contingent and incapable (in many instances) of being enforced, the time taken to register the interest is irrelevant.

 

The problems caused by the deficiencies of the land titling system (or lack thereof) are then further exacerbated by the fact that Pakistani law allows parties to create unregistered security interests in land through the creation of an “equitable mortgage.” More specifically, §58(f) of the Transfer of Property Act, 1882 provides that the mere retention of the title deed to a property gives the holder of the title deed a security interest in the property. Since equitable mortgages are not required to be registered (and consequently are not normally registered), the result is yet more uncertainty for both buyer and lender alike.  More importantly, not only does the system allow for the creation of unregistered mortgages but by imposing a substantial level of taxes on registered mortgages,[27] it used to practically force lenders not to opt for registered mortgages. Not surprisingly, most bankers report that even in the case of the largest loans, they will execute a registered mortgage for a token amount (normally 5%) and have an equitable mortgage for the remainder (though this may change given the recent decrease in rates).

 

The land revenue system is not the only system of land regulation nor is it universally applicable. In traditionally urban areas, no land revenue was payable and hence land revenue records are not available at all. As a consequence, the only centralized record of land available with respect to historically urban areas such as the Walled City of Lahore, are those maintained with the relevant sub-registrar under the Registration Act, 1908 or, in some cases, by the excise department.  Land revenue records are also not maintained with respect to military cantonments which instead have an entirely separate system of records. Additionally, large urban areas have been developed by official housing and development authorities. In each case, these housing authorities (for example, the Lahore Development Authority) maintain their own records. Finally, there are a large number of private co-operative housing societies which maintain their own internal land records.  The end result again is that land records are fragmented across different authorities. In the case of Karachi, urban land is held by eleven different types of authorities: 3.7% of land is, for example, held by more than 50 different co-operative housing societies.[28] Each housing society then operates its own system of records which runs in parallel to the land revenue records. The systems operated by the different societies vary widely in quality with the land records of the military operated housing societies being perhaps the most sophisticated and well organized. Perhaps for this reason, land in military run housing societies commands a healthy premium over urban land in other areas.

Land use and commercialization policies are also extremely problematic in Pakistan. Under the rent restriction laws of Pakistan, every lease is a lease forever – at least until the tenant defaults in payment of rent or the landlord is able to prove his or her personal need for the property in question. Since the law also restricts the landlord’s ability to increase rent, existing tenants often have a very strong incentive not to vacate their leaseholds. The end result, yet again, is litigation which clogs up the legal system. According to one study, for example, approximately 6% of all reported cases decided by the Supreme Court of Pakistan for the period 2000-05, related to rent matters. Conservatively speaking, the minimum amount of time required to evict a recalcitrant tenant is two years whereas 5-7 years is not unusual. The consequence of this unnecessary litigation is that rental space is at a premium. Some landlords refuse to rent their properties to other Pakistanis, instead reserving their properties for multinationals and foreigners. In many cases, people refuse to let out their properties at all, preferring to let their properties stay empty than take the risk of the property being caught up in litigation. To the extent that landlords are willing to rent, it is normal for them to seek massive security deposits (equal to one or even two year’s rent). Finally, to the extent that rent control legislation is effective in preventing landlords from ousting tenants, the protections of the law are exercised not by poor people (who do not have the funds to access courts) but by middle class and by upper middle class people. Thus, to the extent the rent control laws are being justified on grounds of pro-poor protection, that protection is being misdirected. In any event, even if low-income tenants are being benefited by rent control laws, that certainly does not justify the extension of those protections to middle-income tenants.

 

Most Pakistani cities have commercialization policies which severely restrict the ability of commercial developers to develop property.  Part of the problem is due to the simple fact that land use plans were originally developed in the major cities at a time when the population of the cities was considerably less. According to one source, the urbanized land area of Karachi was only 349 sq km as per the 1974 Master Plan but 3,520 sq. km as per the 1988 Master Development Plan.[29] Furthermore, to the extent any town planning was being carried out, it was being done by a bureaucracy which normally saw no reason to accommodate any demand for commercial property. Since the massive increase in population meant that an increase in commercial activity was unstoppable, commercial builders often resorted to illegal tactics in order to protect their projects. This unchecked and unplanned commercialisation has in turn been countered in cities like Karachi by a nascent environmental movement which responds to all commercial development using scorched earth tactics.[30]

 

In comparison to the apparently insoluble complexities of land regulation, the regulation of taxation in Pakistan is not only healthy but one of the clear success stories of the Musharraf regime. The reform drive in the area of taxation was initiated in 2001 following the receipt of a hard-hitting report authored by an independent Task force on Tax Administration which made the fundamental point that “the relationship between the taxpayer and the tax collector is largely adversarial. Neither the taxpayer nor the tax collector has faith in the other’s integrity.”[31]

 

The most important consequence of the report and the subsequent reforms is that the Central Board of Revenue has abandoned its old emphasis on punitive methods and has instead embraced a more open system which provides a more balanced set of incentives to taxpayers.  For example, previously every single income tax return was (in theory) subject to scrutiny. This policy was abandoned in 2002 and instead replaced with an ambitious policy of universal self-assessment. Similarly, on the customs front, every inbound shipment is no longer inspected. Instead, shipments are assessed using a risk-management software which identifies high risk shipments which are then inspected in a manner so as to reduce contact between importers and the valuation experts. Finally, in the context of sales tax, the entire sales structure was streamlined by making most export-oriented industries zero-rated. The result of these reforms has not only been a more business friendly tax regime but a striking increase in tax receipts as can be seen from the gross annual recoveries shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As part of the Finance Bill, 2007, the CBR has been reorganized and renamed as the Federal Board of Revenue. While the change in nomenclature is not important, what is important is that bill is intended firstly to enhance the autonomy of the CBR and secondly to allow an increase in salary to employees of the CBR. The increase in salaries is simple common sense – one cannot realistic pay a miniscule wage to revenue officials and then hope to avoid corruption. The formal autonomous status of the CBR is however, more important because it is a structural reform which will serve Pakistan’s interests well. To understand this point, it must first be appreciated that Pakistan’s tax laws are by and large configured in such manner that all important decisions (such as the rate of taxation of particular goods and the manner of collection) can be determined by the executive branch (i.e. the CBR) without any legislative action. One example of this approach is provided by the Federal Excise Act, 2005. Under §3 of the act, all goods manufactured in Pakistan, all goods imported into Pakistan and all services provided in Pakistan are subject to 15% excise duty. However, under §16, all goods and services except those notified by the CBR from excise duty. Thus, the only goods and services which are actually liable to tax under the Federal Excise Act are those determined by the CBR.

 

Given that taxation policy and rates are controlled by the CBR, it is vitally important that the CBR should be operationally autonomous and not susceptible to “persuasion.” During most of the 1990s, the CBR was not autonomous but was instead seen as a byword for political corruption. In one notorious case, the duty structure applicable to steel was allegedly changed specifically by the Benazir government specifically to try and bankrupt her political opponent (who was the owner of steel mill). Whether that is true or not, the perception regarding the misuse of the CBR was such that when General Musharraf passed the NAB Ordinance in 1999, the abuse of the CBR for political purposes was specifically and separately declared to be a crime.[32]

 

The other consequence of the fact that taxation policy resides in the hands of the executive (rather than the legislature) is that some sort of protection needs to be given to businessmen against arbitrary or unexpected changes in tax rates. The irony of this point is that this protection had been extended to businessmen by the Supreme Court in the Al Samrez case,[33] in which it was held that when the Government withdrew an exemption relating to customs duty, that exemption would not affect such goods with respect to which the importer had already made an irrevocable commitment of payment. Unfortunately, in 1988, the Customs Act was amended through the addition of §31A to provide that no matter what the Government might have said earlier, the rate of taxation would be the rate applicable on the day the goods landed in Pakistan. In short, if the exemption was withdrawn while the goods were in transit, that was the importer’s risk.

 

It is important to understand that §31A only allows the Government to realize the additional customs duty for goods which would be imported within the normal period for which a letter of credit is opened, i.e. about three to four months. By contrast, the change in risk profile for an importer is massive. Now, when the government announces an exemption, the importer has to factor in the risk that the exemption will be withdrawn after the goods have been paid for but before they have landed. If that risk is unacceptable, the exemption will be useless.

 

In comparison to other sectors, the financial sector regulatory mechanisms are both relatively recent and in accord with modern trends. The responsibilities of the central bank are performed in Pakistan by the State Bank of Pakistan (SBP) which was created first by the State Bank of Pakistan Order, 1948 and then, on a more formal basis, by the State Bank of Pakistan Act, 1956. Under the latter act, the SBP is authorised to “regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage”. In 1997, the autonomy earlier granted to the SBP was formalised through a series of amendment ordinances, giving full and exclusive authority to the SBP to regulate the banking sector, to conduct an independent monetary policy and to set limits on government borrowings.

 

While the commercial banking sector is controlled by the SBP, the remaining regulatory functions with respect to the financial sector are carried out by the SECP. The SECP is thus formally responsible for regulating the insurance sector, pension funds and non-banking financial companies such as  investment financial services, leasing companies, housing finance services, venture capital investment, discounting services, investment advisory services and asset management services. In addition, the SECP also regulates various external service providers that are linked to the corporate sector, like chartered accountants, rating agencies, corporate secretaries and others.

 

The legal status of administrative tribunals in Pakistan is a problem which has emerged over the past decade and which has yet to be clearly examined. The problem arises because in a series of landmark decisions from 1997 onwards,[34] the Supreme Court held that the right of access to justice was a fundamental right which required that “judicial power” could only be exercised by “courts”. The term “court” was then restrictively defined to mean tribunals subordinate to the High Court of each province manned by independently appointed judges.

 

The problem with the “judicial power” argument is that it is an extremely amorphous concept, residing, like beauty, in the eye of the beholder. At this point the problems inherent in the adoption of this line of reasoning have yet to fully emerge because the only tribunals which have been examined by the Supreme Court (such as military tribunals) have been ones which have been emphatically unconstitutional. However, there are any number of other administrative tribunals which are less controversial (such as tax tribunals or competition authorities) and which exercise what looks very much like judicial power. Indeed, it is standard practice for a particular area of the economy to be regulated through a comprehensive statute which in turn creates a specialized tribunal to handle disputes arising under the statutes (albeit normally with a right of appeal to the regular judicial hierarchy). Such statutes and tribunals, for example, exist with respect to the oil and gas sector, telecommunications, electricity, electronic media, competition law, corporate law and securities regulation.

 

With notable exceptions, the statutes creating administrative tribunals are relatively new. For example, the Oil and Gas Regulatory Authority was created by statute in 2002, the Securities and Exchange Commission in 1997, the  National Electric Power Regulatory Authority in 1997, the Telecommunications Authority in 1996 and the Electronic Media Regulatory Media in 2002.  This fact is significant because statutory bodies created from the 1990s onwards have normally been created following input from multilateral institutions and with at least some knowledge of the fact that sufficient provision must be made to hire qualified professionals. As a consequence, the administrative tribunals created for each sector are reasonably well regarded by the relevant business communities though the one complaint which is found across the board is that these institutions lack independence when it comes to balancing the government’s interests against those of the private sector.

 

In comparison to the newly created regulatory bodies, the creation of the Board of Investment (BoI) to provide a unified forum for dealing with issues relating to foreign direct investment has been less successful.  Created by the Board of Investment Ordinance, 2001, the BoI is charged by law with the responsibility “to promote, encourage and facilitate local and foreign investment.” However, the institutions which are most directly relevant to foreign direct investment are the SECP and the SBP, not the BoI. The SECP is relevant because all foreign companies which have “established a place of business” in Pakistan are required to provide certain documents to the SECP (such as copies of their memorandum and articles of association.) Furthermore, the repatriation of profits is regulated by the State Bank of Pakistan under the Foreign Exchange Regulation Act, 1947 (“FERA”). Under clause (ii)(l) of Paragraph 13 of Chapter XIV of the Foreign Exchange Manual, any application for remittance of profits must be accompanied by a letter from the Board of Investment giving the relevant company permission to operate in Pakistan. Registration of a foreign company with the BoI therefore confers no additional benefits but is merely a documentary formality. It is also worth noting that foreign companies cannot simply submit one set of documents to the BoI but must submit separate sets of largely identical documents to all three institutions. Finally, while the BoI is legally equipped to serve in a co-ordinating role, it has yet to perform that function. For example, the tourism policy on the website of the BoI states that tourism projects will be entitled to all such concessions as are being provided to industries. However, there is currently litigation pending in the Punjab where the Punjab Government is refusing to treat tourism projects (hotels) on the same concessionary rate as that being allowed to other industries. This dispute is exactly the sort of problem the BoI is supposed to help resolve (and preferably avoid).

 

Implementing Institutions

 

Like many other bureaucratic institutions in Pakistan, the land revenue regulation authorities are divided into two cadres of officials. The lower level cadre of officials consists of village and tehsil-level officials such as patwaris, kanungos, and tehsildars, who serve in the field. The senior level cadre of officials consists of young bureaucrats inducted directly at management positions who oversee the management and administration of land records in positions associated with the various district governments. However, the overall management of the land record system (to the extent of land revenue records) vests not with the district governments but with the provincial Boards of Revenue which are charged by law with “the general superintendence and control over all Revenue Officers and Revenue Courts.”[35]

 

Notwithstanding its elaborate and detailed manuals and mechanisms, the land revenue system is simply a blatant form of institutionalized corruption. Lower level officials, such as patwaris, have massive discretion in the manner in which they perform their obligations and are paid an absolute pittance. As a consequence, the right of the patwari to charge bribes is so well established that it might as well be enshrined in the Constitution. At the higher levels, corruption is less entrenched but nonetheless endemic. The Government of the Punjab is currently spearheading a movement to initiate the computerization of land reveneue records. Certainly, the computerization of the records will increase transparency and will perhaps reduce the patwari’s ability to extract transaction costs. But the computerization of an inherently flawed system only means that that inherently flawed results will be more easily accessible.

 

The Securities and Exchange Commission, which deals with matters such as the registration of companies, was the first of Pakistan’s major regulatory institutions to be thoroughly revamped.  Prior to 1999, the corporate sector and the securities market were regulated by what was called the Corporate Law Authority, which suffered from the usual bureaucratic maladies of bloat and sloth. The SECP was therefore formed as an independent and autonomous regulatory body with broad authority to cover not just the corporate sector and the securities market but a whole host of other areas such as the insurance sector and private pensions. Starting with the appointment of Mr. Khalid Mirza as Chairman,SECP in 2000, the SECP has consistently sought to fill its senior management positions with well regarded professionals. Furthermore, even at the lower end of its ranks, the SECP did not simply continue all the employees of the CLA but instead only employed the pick of the ranks at much higher salaries than were earlier being paid. As a consequence, the SECP has been perceived by the market as being far superior to (and more business friendly than) its predecessor institution.

 

In recent years, the SECP has run into personnel problems, typified perhaps by the abrupt departure of its chairman, Dr. Tariq Hassan, in January 2006. Dr. Hassan was a former World Bank official with an impeccable record who was fired by the Prime Minister during Eid vacations. Dr. Hassan has subsequently claimed that his departure was due to his getting close to a few “big fish” amongst the stock-broking community allegedly responsible for the crash of the stock market in 2005.[36] The merits of Dr. Hassan’s claims may be debatable, but the vision of a former chairman of the SECP publicly accusing the prime minister, the finance minister and the prime minister’s advisor of unethical behaviour has done little for the morale of the institution itself, which has been reported as being at its lowest level since the formation of the SECP.[37] It is also worth noting that the SECP Act, 1997 was recently amended to provide that the policy committee of the SECP would be chaired not by the Chairman of the SECP but by the Finance Minister or his nominee. As a consequence, the SECP is certainly less autonomous than it was before. The decline of the SECP, however should not be over-emphasized. Recently, the SECP undertook a pre-emptive takeover of an investment bank (owned by a politically influential family) whose management had invested funds into real estate schemes in apparent violation of applicable laws. The swift action by the SECP avoided a wider fallout, established a welcome standard of oversight and resulted in the protection of the general investor through a negotiated sale in favour of a fresh investor who has agreed to make full payment, inclusive of accumulated interest, to almost all the concerned parties.

 

The State Bank of Pakistan is the main institution charged with regulating the financial sector, and in particular, charged with regulating commercial banks. The State Bank has consistently been regarded as one of the premier policy institutions and, as a consequence, has managed to maintain high levels of professionalism. In recent years, the State Bank has taken an important step towards maintaining its distinct status by spinning off its day to day operations into a separate subsidiary company controlled by the State Bank and leaving the main State Bank to deal with higher level policy issues. The State Bank has therefore continued to produce high levels of economic research and is staffed by a relatively well qualified team of professionals. The State Bank was thus headed for a period of six years (1999 — 2005) by Dr. Ishrat Hussain, a well respected former World Bank official. After his retirement, he has been replaced by Shamshad Akhtar, a former ADB official and Pakistan’s first female governor of the State Bank.

 

Notwithstanding its many strengths, the State Bank continues to be hampered by its assumption that it alone stands between the nation and fiscal ruin. That attitude may have been justified when the banking sector was dominated by public sector banks but is no longer justified in today’s situation when the banking sector has been largely privatised.  In this context, specific reference may be made to the SBP’s recently promulgated guidelines regarding write-off of loans.[38]  Under the new guidelines, loans can only be written off once all liquid securities and assets have been exhausted and after the relevant bank official has certified that neither the borrower nor the guarantor have any known means of repayment.  It is not in dispute that during the 1980s and 1990s, the write-off process was exploited by well-connected political figures and business at the expense of public sector banks. However, once those banks have been privatized, it follows that the decision whether or not to write off a loan should be left to the commercial discretion of the banks themselves. The irony of the SBP’s position is that the SBP is well aware of the fact that such maximalist regulations only lead to a build-up of unsustainable debt within the banking system which eventually has to be removed, as was the case in 2003, through a general amnesty scheme.  To the extent the SBP wishes to establish limitations on the write-off process, it should seek the promulgation of the draft Corporate Rehabilitation Act which was drafted with the active involvement and engagement of the State Bank.

 

As noted above, the current system of labour laws fails to benefit either the business or the worker communities. Furthermore, the labour system fails miserably in providing benefits to those workers who are covered by the myriad laws enacted ostensibly for their benefits. Since benefit schemes are disaggregated amongst many different authorities and hence workers seeking benefits have to access a number of different offices to get their benefits. More importantly, funds which are collected ostensibly for the benefit of workers all wind up going into the Federal Consolidated Fund from which limited amounts are then doled out to provincial committees which in turn have limited capacity to spend the funds and even less ability to ensure that those funds do not get misused. In the year 2005-06, a total of Rs. 10.6 billion was collected as workers welfare fund contribution, the total budget allocations of the provincial workers welfare boards was Rs. 4.91 billion and the total amount actually spent by them was Rs. 2.59 billion. In other words, almost 75% of funds collected for the purpose of workers welfare, were never spent for that purpose. The retention of funds earmarked for employee benefits by the federal government is a scandal which even the State Bank has strongly condemned.[39]

 

The most significant new development in the field of labour regulation is the turn away in the new labour policy of 2002 from a trilateral approach (with workers, employers and government all involved in negotiations) towards a bilateral approach. In a trilateral system, both workers and management see no reason to compromise because the casting vote is with the government representative. In a bilateral negotiation system, both parties have an incentive to drop their maximalist positions and instead try to reach a reasonable compromise. The push towards a bilateral approach appears to have been initiated first by the Workers and Employers Bilateral Council of Pakistan (Webcop), an institution founded by 54 founding representatives from both the workers and the employers sides.  Subsequently, when a new labour policy was promulgated in 2002, it stated explicitly that “Bilateralism is the core element of the new Labour

Policy. The principles, objectives and action programme of the policy concentrate on the creation of relationship of trust and cooperation between employer and employee under the strategy of least intervention by the state.”  Furthermore, bilateralism appears to be not just an empty slogan but one which has genuine support from all stakeholders. According to one government representative, the recent raise in the minimum wage had not been independently decided by the Government but had been referred to Webcop for an equitable decision. As he put it, “these guys have to deal with each other and so they act reasonably. If they were talking to us, there would be no hope.”  In addition to Webcop, the labour sector appears to be one of the few areas in which there is an outside agency which genuinely contributes to the terms of the debate through research and analysis, namely the Employer’s Federation of Pakistan (EFP).  Formed in 1950, EFP is one of the oldest institutions of its kind in Pakistan and one which is regularly involved at both the national and international level in representing the interests of the Pakistani business community.

 

Notwithstanding the existence of such genuine institutions as Webcop and EFP, the current status of labour regulations is certainly not something which can be defended as either appropriate or justified. The short version is that at present, the governments of both Sind and the Punjab have simply suspended all labour inspections for all practical purposes. Furthermore, the suspension of inspections is not being done sub rosa but with considerable pride. The representatives of the Sindh Government, for example, were at pains to stress the fact that they had stopped all inspections as part of their “business friendly” polices. Similarly, the Punjab Government announced its move to suspend inspections as part of its Industrialisation Policy 2003.[40]

 

In order to understand this drastic step, it needs to be recalled that by 2003, the combination of practically unlimited discretion and minimal pay had earned labor inspectors a well-deserved reputation for rent-seeking. Nonetheless, allowing the de facto suspension of the current labour regulatory system is a dangerous tactic and can easily lead to the demise of what looks to be a promising start towards bilateral cooperation.

 

In the meantime, the only compensatory pressure being applied with respect to social compliance issues is that being applied by international businesses. The most well-know case in this regard is that of Saga Sports in Sialkot whose long-standing relationship with Nike was cancelled due to concerns over the treatment of workers. Nike has instead entered into a relationship with a different company by the name of Silver Start Sports, which has in turn promised a generous array of benefits to its workers. Furthermore, while Nike has its own social compliance team, many export oriented industries (including the textile sector) are cognizant of this aspect and are trying to pre-empt international concerns by getting themselves certified as SA 8000 compliant. The Ministry of Commerce is also trying to assist in this regard by subsidizing compliance and certification procedures for international standards such as SA 8000. However, businesses which are not export oriented obviously feel no reason to get certified as being compliant with SA 8,000. Thus, while the Ministry of Commerce’s initiative is certainly a good step forward, it is by no means an adequate replacement for a functional monitoring system with respect to labour rights.

 

In the context of tax regulations, one of the most significant changes in recent has been the complete overhaul of the internal dispute resolution process with respect to taxation disputes. Only a few years ago, the situation was dire. This situation was then tackled through a number of measures, most notably through the introduction of Alternate Dispute Resolution procedures and the addition of extra officers to deal with disputes. As a consequence of these measures, more than 82,000 pending appeals have been disposed of at the collectorate/commissioner level and the only cases now pending before the CBR’s internal hierarchy are fresh cases. The disposal of cases has also been pursued with the formal judicial hierarchy as well with encouraging results. Thus, out of 25,000 appeals pending with the appellate tribunal, almost 21,5000 have been disposed of while similarly, out of the 1950 appeals pending with the Supreme Court, 1650 have been disposed of leaving behind a pendency of only 293 cases.[41] This overhaul of the dispute resolution system is certainly one of the most welcome (and significant) changes to have taken place in Pakistan’s regulatory regime over the last few years.

 

At present, the institution charged with monitoring competition law is the Monopoly Control Authority (MCA) which functions under the Monopolies and Restricted Trade Practices Ordinance, 1970 (MRTP). The MRTP has been scheduled for some time to be replaced by a new competition law drafted with assistance from international agencies such as the World Bank. The current status of the new law is however unclear. According to some reports, the draft law has been shelved for the time being due to opposition from “vested interests.”[42] If true, this would be an unfortunate development as the enactment of a new competition law is considerably overdue.

 

The current competition law is predicated on the assumption that the accumulation of wealth in private hands beyond a particular amount is against the public interest. Consequently, the primary function envisaged for the MCA is the identification and removal of unsightly private wealth (“the undue concentration of economic power”)[43] with the removal of anti-competitive anomalies (‘unreasonably restrictive trade practices”) coming in a very distant second. Not surprisingly, the MCA’s own website states that, “the existing law . . . is not in line with the policy of the government for a free market economy with key elements of liberalization, de-regulation, privatization and attracting investment.”[44]

 

Perhaps because of its unrealistic mandate, the MCA has kept a very low profile for most of its existence, and particularly since 1977. Recently, however, the MCA has emerged from the bureaucratic wilderness to try and reinvent itself as a competition authority, resulting in well-publicized orders against cartels operating in the cement and sugar sectors. Unfortunately, the MCA’s efforts have failed and its constitutional status has been challenged before the courts (which have also suspended enforcements of the orders).

 

Supporting Institutions

 

Discussions regarding regulatory reform in Pakistan take place almost invariably with the involvement of a minimal number of people and in the face of complete apathy from the bar associations, the media, academia and most importantly, Parliament. The fact that there has been considerable regulatory reform within the past few years has nothing to do with any systemic or institutional improvements: instead, such reform has been driven entirely by a few competent and driven individuals appointed at the top of their respective institutions by the current regime.

 

To understand this sorry state of affairs, it is necessary to return once more to Pakistan’s roots as a colony of the British empire. When Pakistan became independent in 1947, it inherited a very weak system of parliamentary governance and a very strong system of bureaucratic administration. In the famous words of Hamza Alavi, Pakistan was at birth an “over-developed state.”[45] As a consequence of this inheritance, and helped in no small part by the abysmal performance of democratic institutions during the early years, the bureaucracy acquired a dominant role in not just administering but developing economic and social policy, which role it has not relinquished till date. Furthermore, the bureaucracy certainly did not see its primary role as the facilitation of private enterprise: Pakistan’s capital was shifted in 1962 from Karachi to Islamabad precisely so that government officials could be protected from the supposedly corrupting influence of businessmen. The dominant role of the bureaucracy was also not changed by the advent of socialism under Prime Minister Zulfiqar Ali Bhutto. Instead, the bureaucracy enthusiastically participated in the large-scale nationalization of industry because state control of the means of production was an idea which dovetailed perfectly with the pre-existing notion of a centrally planned and controlled economy. The subsequent years of martial law only consolidated the hold of the bureaucracy on regulatory issues

 

So far as the year’s following General Zia’s dictatorship are concerned, it is a moot point as to whether the bureaucracy’s unchallenged dominance on policy issues was due to the abdication by Pakistan’s elected representatives of their fundamental responsibilities or whether Pakistan parliamentarians degenerated into a familiar pattern of corruption and rent-seeking because they were left no option by “the system.” The fact remains that Benazir Bhutto was twice elected to power in 1989 and in 1993 and that in both instances, her governments failed to pass a single act of parliament worth remembering (other than the annual budget). Nawaz Sharif’s record is considerably better in this regard but the regulatory reform laws passed by his governments (such as the SECP Act, 1997) were never debated to any meaningful extent by Parliament. In fact, the Nawaz Sharif government passed two constitutional amendments in 1998, both without any debate whatsoever! Furthermore, the second of those amendments changed the Constitution to provide that any member of Parliament who voted contrary to his party’s instructions could be expelled from parliament. Clearly, members of Parliament were not being expected to provide intellectual input on legal reform issues.

 

To General Musharraf’s credit, he has not taken the route chosen by his democratic predecessors and simply outsourced policy analysis to the donor community. Instead, there has been a genuine effort by the government to utilise and empower domestic resources and experts. Nonetheless, the current situation is still very much that legal reform is discussed meaningfully only by a very small number of people, the vast majority of whom are government servants.

 

It also needs to be appreciated that the legal community is not particularly interested in regulatory reform for the simple reason that most lawyers deal only rarely, if ever, with business issues. One reason for this unusual fact is that there is an enormous amount of property related litigation which keeps lawyers busy and that as a consequence of the resulting delays, businessmen see civil courts as a complete waste of time. Thus, rather than seek damages for a breach of contract case, a businessman is more likely to try and initiate criminal proceedings against his opposing party so as to negotiate a solution on his preferred terms. Commercial cases pending in the courts therefore tend to relate far more to disputes between a businessman and the state rather than private-private disputes.

 

The regulatory framework does not get much attention from universities and think tanks either. In the first instance, higher education in Pakistan is only now beginning to emerge from decades of not just neglect but absolute squalor. Till very recently, there was practically no research of any worth being done in any of the universities, especially in areas other than the hard sciences. Secondly, to the extent there was any work being done with respect to the social sciences, such work was often conducted by an intelligentsia hostile to the concept of private enterprise.  Once again, there are now some bright signs. For example, the Lahore University of Management Sciences has started a new school for Law and Public Policy. Similarly, the Pakistan Institute of Development Economics (PIDE) had recently shown extremely encouraging signs of life under the dynamic leadership of Mr. Nadeem ul Haque, a former senior official of the IMF. The fact that Mr. Haque has since resigned his post due to lack of institutional support is quite unfortunate. As noted by Mr. Haque himself, imported expertise is only rarely a substitute for home-grown solutions.[46]

 

In comparison to the slow pace of change in the academic and legal sector, the private sector is showing itself as being increasingly capable of conducting policy analysis. The most usual form of private sector participation in regulatory reform is through policy suggestions forwarded by the regional chambers of commerce and industry (with the Overseas Investors Chamber and the Karachi Chamber being the most active). There are also numerous sector-wise trade associations which regularly interact with the government of which the All Pakistan Textile Manufacturer’s Association (APTMA) is by far the most active. In the context of labour laws and regulations, the Employers Federation of Pakistan (EFP) is an extremely well organized entity which presents the industry perspective with considerable force. Finally, professional associations, such as the Institute of Chartered Accountants of Pakistan (ICAP), are highly regarded and consulted in issues related to their field.

 

Social Dynamics

 

It cannot be doubted that the last few years have been a watershed moment in Pakistan’s economic development and that Pakistan’s laws are now far more accessible and open to private enterprise than at any moment prior in Pakistan’s existence. Notwithstanding this welcome news, it also needs to be remembered that these changes have been driven almost entirely from above through the appointment of key individuals to key posts, with the appointment of Mr. Abdullah Yousaf as the Chairman CBR being perhaps the best example.

 

The problem here is that while the ad hoc appointment of talented individuals to key posts works in the short term as a reform strategy, it does not work in the long term. In fact, even in the short term, it is a strategy which is limited to a few areas of excellence. The challenge then is to evolve appropriate institutions which will continue to drive reform in the future.

 

The obvious reform option is to try and increase the capacity of Parliament to provide leadership on regulatory reform issues. In an ideal world, this would certainly be the best option: the only problem here is that most of Parliament itself is not particularly interested. The simple reason for this attitude is that Pakistan already has a very strongly developed political culture in which the primary expectation from parliamentary representatives is the delivery of spoils. That culture certainly needs to change but the chances of it changing radically (and sufficiently) in the immediate future are slim. As proof, one may note that even though this is an election year, there is currently no policy debate going on between the various political parties nor have any of the main opposition parties made any effort whatsoever to campaign on the basis of their vision for government. The current website of the Pakistan Peoples Party, for example, lists only one document on their website under the heading “What’s New”, which document in turn consists of a laudatory ode (in rhyming verse) regarding the achievements of the late Zulfiqar Ali Bhutto.[47]

 

The other reform option is to try and activate civil society so that the citizens themselves can serve as the engines of change. While this option is again wonderful in theory, the fact remains that Pakistan’s civil society organisations are still nascent and in no condition, yet, to serve as the basis for sustained regulatory reform.

 

Given the fact that there are no other options available, the answer which emerges is that regulatory reform can only be institutionalized by working with and through the bureaucracy, not by running it into the ground. The problem here is that ever since independence, various political regimes have sought to consolidate their power by weakening the powers and independence of the civil service. Thus even though Pakistan was fortunate to inherit a civil service in which the country’s best and brightest were proud to serve, decades of deliberate neglect have since destroyed the bureaucracy’s ability to attract human capital. In 1969, Aitzaz Ahsan (currently a famous lawyer, and then a fresh graduate from Cambridge) created a nationwide scandal by refusing to join the Central Superior Services after standing first in the competitive exam. Today, there is absolutely no chance that somebody with the equivalent of Mr. Ahsan’s skills and qualifications would even sit for the CSS exam. In the words of one commentator, the only thing which is still superior about the civil service is its attitude. Today, the civil service in Pakistan represents the worst of both worlds in which bureaucrats still control all the levers of power but they are no longer paid a living wage and are ominously susceptible to political interference.

 

Given this situation, it would seem counter-intuitive to strengthen a bureaucracy in a nation which has already suffered in the past from an excess of central planning. The short version, however, is that political and administrative system of Pakistan is already optimized for executive action. If those executive officials can be convinced of the merits of regulatory reform, the entire system will follow suit. More importantly, there is much that can be done relatively easily.

 

At present, the senior ranks of the civil service in Pakistan are filled through a competitive exam in which young graduates (aged between 21 and 28) take part. In 2006, a total of 7066 candidates applied for positions out of which 275 were selected for further training. The candidates who succeed then select their practice group from a list of ten options (such as the Foreign Service or the police). All candidates are first provided a common training program of one year followed by separate courses related to their individual practice areas. At the end, the annual graduating class inducted into what is termed the Central Superior Services tends to number between 100-150.

 

The point to note from the above is that the annual intake of the civil service is still a very small number, many of whom still join with the best of intentions. Furthermore, notwithstanding its many vicissitudes, the senior bureaucracy is still regarded with considerable awe by the general public.  The simplest way then to ensure that the best and brightest once again start applying for government posts is to start paying them not just a living wage, but a wage which competes favourably with the best that the private sector has to offer. The second step which needs to be taken is that the education of civil service entrants needs to be upgraded and radically revised.

 

The current training of the civil service entrants does not accomplish much besides teaching them how to ride and how to understand the land revenue records. According to the current Director-General of the Civil Services Academy, civil service entrants do not need to be taught how to ask questions. Instead, that very dangerous step was to be reserved till such time that they qualified for further training, approximately 10-15 years later.

 

The solution here is not to change or reform the training being provided at the Civil Services Academy but to change the academy itself. Pakistan now boasts several excellent liberal arts and business schools which are internationally competitive. In the presence of these universities, it makes no sense for civil service entrants to continue be taught in isolation. Instead, the civil service authorities should work out training programs to educate civil service entrants at these universities. It is extremely significant to note that the CBR has already adopted this position by sending all its junior officers to study for a one year executive MBA at the Institute of Business Administration in Karachi. That model now needs to be expanded to include all civil service officers, with preference being given (if necessary) to officers of the District Management Group as they are the ones most likely to be placed in policy-making positions.

 

Women

 

Regulatory reform is obviously necessary on a systemic basis to protect the rights of women. The clearest example of this point is, once again, the regulations relating to land. Islamic law provides clearly for the inheritance rights of women but in actual practice, women rarely received their Islamic share of inheritance, particularly when the inheritance consists of real property. Because land holdings are so non-transparent, women often have no idea as to what the assets available for distribution. More importantly, agricultural land in rural areas tends to be held in common by multiple co-owners. Since women are often not physically present at the site of the land, having moved out of their parental household as a consequence of marriage, one of the most common ways in which women get cheated out of inheritance assets is that their brothers or other claimants will argue that the asset in question has been orally gifted to them. Since brothers normally live in the parental house and till the parental lands, a woman who wants to challenge the “gift” faces the prospect of decades of litigation during which time her brother occupies and enjoys the land at her expense.

 

Women are also disproportionately hurt by the laws of benami. Thus, even if a husband buys and places land in the name of his wife, or if a father places land in the name of his daughter, it is open to later claimants to question the title of the daughter or the wife to that land. Since women are often at a remove from familial lands, they are consequently restricted in their ability to maintain possession of their lands and to thereby protect their assets. When it comes to land-related litigation in Pakistan, possession is a lot more than nine-tenths of the law.

 

From 2001 onwards, Pakistan has seen a grand experiment in gender sensitization through the provision of reserved seats for women at all levels of government. To the extent that this provision of reserved seats was supposed to result in increased gender sensitivity in Parliament (or in the provincial assemblies) it has yet to bear significant fruit. Female parliamentarians, like their male counterparts have shown no appetite for reform whatsoever. The debate on the Women’s Protection Act in 2006, for example, was entirely on partisan lines with no deviation being shown by parliamentarians on the basis of the gender-sensitivity of the law.

 

In comparison to parliamentary reform, the chances of getting pro-women regulatory reform through the bureaucracy are far higher.  In the first instance, the bureaucracy is regarded socially as an acceptable career for women in Pakistan (which helps qualified women apply for government posts). Furthermore, it is far easier to sensitise a limited number of civil servants to the need for gender-based reform than it is sensitise an entire population.  To the extent then that gender based regulatory reform needs to be advanced in Pakistan, it would certainly be strengthened if the current crop of civil service entrants were placed within the confines of a modern liberal arts university.

 

Recommendations

 

  • The laws affecting personal liability for corporate acts need to be reviewed and revised so as to firmly establish the concept of limited corporate liability. In particular, the crime of willful default under the NAB Ordinance needs to be repealed.

 

  • The land regulatory system needs to be comprehensively re-examined and reworked. More specifically:
    • A system of recorded title needs to be developed, most likely on the basis of the land use records maintained by the excise department.
    • Pre-emption laws need to be repealed.
    • The right of benami needs to be abolished.
    • Oral gifts and transfers of land need to be abolished.
    • The Transfer of Property Act should be amended to disallow equitable mortgages and taxes on registered mortgages should be minimized if not eliminated.
    • The Registration Act, 1908 should be amended to provide that powers of attorney relating to land must be registered only in the locality where the land is situated.
    • It needs to be studied whether there is any manner available to formalize the Islamic inheritance system, consistent with Islamic law, so as to avoid the problems currently created by it.
    • The rent control laws need to be revised and/or abolished.

 

  • The draft competition law needs to be finalized and enacted.

 

  • The draft corporate rehabilitation act needs to be finalized and enacted.

 

  • §31A of the Customs Act, 1969 should be repealed.

 

  • The law creating the FBR needs to be amended to provide formally for the autonomy of the FBR. The Chairman FBR should therefore be appointed for a fixed five year term and should be removable only for good cause shown.

 

  • A comprehensive program of civil service reform needs to be initiated in which adequate arrangements are made to pay not simply a living wage to bureaucrats, but wages such that the civil service can once again compete with the market for the best minds.

 

  • The education and training of civil service entrants needs to be reviewed and revised. Instead of continuing with mediocre standalone programs, the training of the civil service should be carried out at the best universities of the country through special programs.

 

  • Independent think tanks need to be funded and created so as to promote rational and well reasoned policy research in Pakistan.

 

[1] Both quotes are from Abraham Eraly, “The Last Spring: The Lives and times of the Great Mughals” (Penguin 1997), p. 722.

[2] Boswell, “The Life of Johnson” cited at http://www.samueljohnson.com/dogwalk.html#53

[3] World Bank, Doing Business Report 2007, p. 45

[4] Companies Registrations Offices Regulations (2003), SRO No. 89(I)/2003

[5] World Bank, DB 2007, p. 45;

[6] FIAS Report, p. 168

[7] See clause D, BSD Circular Letter No. 7 dated 31 May, 1972 (“No banking company shall make advances to a private limited company without obtaining a personal guarantee of the directors of such company in addition to the normal security which the banking company may require.”)

[8] Regulation R-10, Prudential Regulations for Corporate/Commercial Banking, issued by State Bank of Pakistan (www.sbp.org.pk/publications/prudential/PRs-Corporate.pdf)

[9] National Accountability Bureau Amendment Ordinance, 2000

[10] See §25Aof the NAB Ordinance, added vide National Accountability Bureau (Second Amendment)Ordinance, 2000

[11] See §200 of the Income Tax Ordinance, 2001

[12] http://www.eobi.gov.pk/InstitutionalStrategy/institutional%20strategy-main.html

[13] Employers are required to pay 6% of an employee’s salary under the Employees Old Age Benefits Act, 1976 and 7% of an employee’s salary under the Provincial Employees Social Security Ordinance, 1965. In addition, 2% of profits is payable under the Workers Welfare Fund Ordinance, 1971 and 5% is payable under the Companies Profits (Worker’s Participation) Act, 1968.

[14] See Notification dt. August 8, 2006 issued by the Minimum Wages Board, Punjab (minimum wage for head mali (gardener) in “Cycle and Cycle Parts Manufacturing Industry” fixed at Rs. 166.65 per day; wage of normal mali fixed at Rs. 158.96)

[15] See World Bank Report No. 38075-PK, “Pakistan Labor Market Study: Regulation, Job Creation and Skills Formation in the Manufacturing Sector”, p. 20.

[16] Chart and figures taken from World Bank Report No. 38075-PK, “Pakistan Labor Market Study: Regulation, Job Creation and Skills Formation in the Manufacturing Sector”, p. 20.

[17] According to one source, there are only 32,000 registered workers in Sialkot out of a total workforce of 300,000. Similarly, the Sindh Social Security department proudly reports that it has a total of 412,000 registered workers whereas the total population of Sindh is about 40 million and the workforce eligible for registration is estimated at 4 million.

[18] Government of Pakistan, Labour Policy 2002, p. 13 (http://www.pakistan.gov.pk/divisions/labour-division/media/LP2002.pdf)

[19] See Schwartzberg, A Historical Atlas of South Asia (p. 214) at  http://dsal.uchicago.edu/reference/schwartzberg /pager.html?object=252&view=text (“land revenue provided roughly 56% of the total revenue of British India in 1856-57).

[20] See generally, Dutt, “Economic History of India” (online at http://socserv2.mcmaster.ca /~econ/ugcm/3ll3/ dutt/EcHisIndia2.pdf

[21] Sir James Douie, “The Settlement Manual” (Sixth edition)(reprinted by Mansoor Book House, Lahore), paras 1-2.

[22] “Efforts under way to evolve uniform law of Benami transactions in provinces,” Dawn, May 10, 2005

[23] In Sialkot, the team was shown a register which recorded a share of 7/2506 of a particular person which proportionately amounted to about 20 sq yards of agricultural land. According to the EDO (Rev), neither the size of the holding nor the proportion held were unusual.

[24] “Land Markets in Peshawer and Karachi,” Issues and Polices Consultants, p. 5. In some cases, notably with respect to the Defence Housing Authority, Lahore, powers of attorney are simply not accepted because of concerns regarding fraud.

[25] Study conducted by Mr. Shahid Kardar, copy on file with author.

[26] As noted by the Privy Council in as far back as 1872, “the difficulties of a litigant in India begin when he has obtained a decree” (cited in Jameela Pir Buksh v. Appellate Authority, 2003 SCMR 1524).

[27] Till 2003, a total of 2% was payable in the Punjab which has now been reduced to a total of .045%. However, total charges in Sind are still at 2%. Unregistered equitable mortgages, by comparison are free.

[28] “Land Markets in Peshawer and Karachi,” Issues and Polices Consultants, p. 25

[29] http://www.urckarachi.org/land.htm

[30] A good example of the typical article opposing commercialization is provided by Fatima Bhutto, “Dubaistan.” http://www.thenews.com.pk/daily_detail.asp?id=43295. For a comprehensive response to Ms. Bhutto’s article, see “Development blues of the coast of Karachi”, http://www.thenews.com.pk/daily_detail.asp?id=43295 http://ko.offroadpakistan.com /karachi/2007_02/development_blues_of_the_coast_of_karachi.html

[31] The Report of the Task Force on Reform of Tax Administration can be accessed at http://www.cbr.gov.pk

[32] See §9(a)(vii) of the NAB Ord.,199 (corruption and corrupt practices defined to include the issuance of “any directive, policy or any SRO or any other order which grants or enables any undue concession or benefit in any taxation matter”).

[33] Al-Samrez Enterprises v. Federation of Pakistan, 1986 SCMR 1917

[34] Mehram Ali v. Federation of Pakistan, PLD 1998 SC 1445; Liaquat Hussain v. Federation, PLD 1999 SC 504

[35] See §4, Punjab Board of Revenue Act, 1957.

[36] Rauf Klasra, “State Minister, adviser accused of links to brokers,” The News International, July 8, 2006

[37] Naveen Mangi, “Challenges for the new SECP Chief” Dawn, Jan. 23, 2006.

[38] BPRD Circular No. 6 of 2007 dated June 5, 2007

[39] See SBP’s Financial Sector Evaluation, 2003 at http://www.sbp.org.pk/publications/FSA-2003/Chapter_6.pdf.

[40] Punjab Industrialisation Policy 2003 (Copy on file with author). See also “CM announces social security reforms, industrial body”, Daily Times, June 25,2003 (at http://www.dailytimes.com.pk/default.asp?page=story_25-6-2003_pg7_17) A new national Labour Inspection Policy has been promulgated but it does not appear as if any significant steps are being taken towards its implementation. The Labour Inspection Policy 2006 can be accessed at http://www.pakistan.gov.pk/divisions/labourdivision/media/LIPDraft5Mar06.pdf

[41] See Quarterly Report, May 12, 2007 at http://cbr.gov.pk/FRS/2007/May12-2007.pdf;

[42] Ihtashamul Haque, “Government drops Competition Commission Plan”, Dawn, June 21, 2007. See also Monem Farooqi, “Legislation against Industrialists delayed”, Nation, July 4, 2007.

[43] Section 3 of the MRTP declares all “undue concentration of economic power” to be illegal. Under section 4 of the MRTP, all undertakings with an aggregate value of more than Rs. 4 billion (US$ 66.66 million) which are not owned by a public company or owned by a public company in which one person controls more than 50% of the voting shares constitute an “undue concentration of economic power.”

[44] See http://mca.gov.pk/message.htm

[45] Hamza Alavi, “The State in Post-Colonial Societies” (New Left Review, July/August 1972)

[46] Nadeem ul Haque, “Where do policy ideas come from in poor countries?” http://www.brecorder.com/index.php?id=431640&currPageNo=1&query=&search=&term=&supDate=

[47] http://www.ppp.org.pk/mbb/Poems/poem7.htm

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