Activist Judge Torpedoes Tax Collection Project in Pakistan

In yet another egregious example of  increasing judicial activism, Islamabad High Court's Justice Shaukat Aziz Siddiqui, the judge who also ordered Musharraf's arrest, has suspended Pakistan's top tax collector Arshad Hakeem. Hakeem was working on an ambitious technology-based project to go after powerful tax dodgers in the country.

In a country where the rich and the powerful pay little or no tax, Ali Arshad Hakeem became "a hated man" in just seven months after his appointment as FBR chairman, according to a report in the UK's Telegraph newspaper.  Coming from IT and business management background  Hakeem put in place a database designed to monitor the spending habits of millions of people, and calculate how much tax they owed. At the click of a mouse, he could look up details of the elite's holiday habits, electricity bills and bank accounts, complete with photos, addresses and vehicle details, said the newspaper.

By linking government databases on cars, imports, exports and sales tax among others, he built a powerful tool for the Federal Board of Revenue (FBR) that could identify individuals and companies which were not paying their fair share. For income tax, his team fed 1,700 factors into a model which calculated how much was owed.

Pakistan tax-gdp is among the lowest and its tax policies are among the most regressive in the world. Direct taxes make up less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at Federal Board of Revenue, according to former finance minister Shaukat Tarin. The bulk of the tax receipts are collected in the form of sales tax, placing the heaviest burden on the lower-income people who spend almost all of their income on their basic needs.

 Hakeem's efforts to change the situation and collect from the rich and powerful came to a grinding halt last month when Justice Siddiqui suspended Mr Hakeem for alleged violations of appointment rules.

Other damaging examples of economic judicial activism include cancellation of Pakistan Steel Mills privatization, annulling of Reko Diq mining contract and voiding of rental power deals with foreign investors.

Since the cancellation of Pakistan Steel Mills privatization deal in 2006, PSMC has suffered huge losses that cost the taxpayers tens of billions of rupees--Rs 26.5 billion in 2009,  Rs 11.5 billion in 2010, Rs 11.4 billion in 2011 and Rs 21 billion in 2012. Had Prime Minister Shaukat Aziz's government been allowed to proceed with privatization in 2006, the PSMC would have been a significant contributor to the national exchequer rather than a huge drain on the public treasury.  The money saved could have been used to fund education, healthcare, energy and infrastructure projects in the country.

Similarly, the Supreme Court has intervened and scared away foreign investors by its decisions in Reko Diq and Karkey rental power company. Had Reko Diq been allowed to continue, it would have represented a huge $3.3 billion foreign investment in Pakistan's Balochistan region.

Umar Cheema, a journalist and author of the report that showed how few politicians pay tax, told Telegraph's Rob Crilly that anyone attempting reform risked being brought down. "He made people realize the FBR was doing something under his watch, even though he was not there for very long" he said.

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Prime Minister Shaukat Aziz's Legacy

Comments

Riaz Haq said…
Here's an FT report on Nawaz Sharif's plans to revive economy:

Nawaz Sharif, Pakistan’s new prime minister, will appoint private sector managers to run state companies in efforts to revive an economy starved of investment, say leaders of his party.
Mr Sharif, who has been prime minister twice before, launched a similar policy in 1997 when he appointed commercial bankers to run three large public sector banks. All three became profitable and two, Habib Bank and United Bank, were privatised.

The plan faces a backlash from trade unions. Mr Sharif’s aides compared the process to the privatisations in the UK by Margaret Thatcher after she became prime minister in 1979.
Sartaj Aziz, former finance and foreign minister and a leader of Mr Sharif’s Pakistan Muslim League-Nawaz, told the Financial Times: “The formula is simple. You appoint good people, you allow them to appoint their people and you empower them. The government helps wherever it can.”

Officials said Ishaq Dar, a confidant of Mr Sharif, would take up his former post of finance minister in the new government.
Final results have yet to be declared but business leaders have welcomed a vote that will probably allow Mr Sharif, a wealthy Punjabi steel magnate, to have an absolute majority in parliament without the need for coalition partners.
Investors in Pakistan said they were tired of grappling with power cuts of up to 20 hours a day, widespread corruption in public life and an inefficient public sector. Mr Sharif has identified rescuing the economy as his number one priority.
A central bank official said public sector companies in power, rail transport and aviation run up huge losses each year amounting to more than 2.5 per cent of gross domestic product. “These are clearly white elephants,” he said.
Mian Muhammad Mansha, the Lahore-based owner of a Pakistani conglomerate who is reputed to be the country’s richest man, approvingly quoted a reference to Thatcher as a “modern Joan of Arc” and said Pakistan needed structural reforms similar to hers.
“First you need to get all these public sector companies out of government control,” he said. “This will release so much money that they are losing and it will make politics clean.”

The 1997 bank plan saw Mr Sharif’s government dismiss some 20,000 employees who were all given large redundancy payments. The current reform plan may meet resistance not only from unions but from politicians who are used to arranging contracts for their businesses from public sector companies.

“Mr Sharif will have to keep his own politicians under control if he wants his plan to succeed. In the past, many have thrived on patronage,” said Suhail Jehangir Malik, an economist. “Public sector companies are a huge drain on our national economy. Reforming them must be a primary objective for the new government.”
The plan is likely to win support from international donors, including the International Monetary Fund, which is expecting to begin negotiations shortly on a new $9bn loan to stave off a balance of payments crisis. Pakistan’s foreign reserves are equivalent to the value of two months of imports.
“The problem with Pakistan is both macroeconomic weakness and long-term structural issues,” said one person involved in preliminary talks with the interim government in power over the election period. “Given the severity of the economic problems, we do need to have a government that is going to undertake quite serious economic reforms.”
Under a so-called extended fund facility of up to four years, Pakistan would be expected to cut its budget deficit by increasing tax revenues, directing subsidies more accurately towards the poor and introducing policies to encourage foreign direct investment.


http://www.ft.com/intl/cms/s/0/374bc1a6-bbe8-11e2-a4b4-00144feab7de.html
Riaz Haq said…
Here's an Express Tribune story on the adverse economic impact of activist judges in Pakistan:

Former State Bank of Pakistan governor Dr Ishrat Hussain claims that the country’s economy has suffered as a result of interventions by the Supreme Court in recent years.
While addressing the International Judicial Conference’s working group on Saturday, he said the country’s risk profile has been elevated as the investors fear of being embroiled in endless litigation.
“Even if the investors overcome procedural hurdles, they are now faced with an additional concern of being dragged into the court over legal lacunas, which adds to uncertainty and unpredictability of investing in Pakistan,” the former central bank chief said.
Dr Hussain said that despite fulfilling the requirements, the fear that the country’s courts may take suo motu notice of the transaction, and subsequently issue a stay order, deters businesses from investing in Pakistan.
“A large number of frivolous petitions are filed every year that have dire economic consequences. While the cost of such filings is insignificant the economy suffers enormously,” he added.
Highlighting SC’s judgments in cases such as, Reko Diq, LNG project and privatisation of Pakistan Steel Mills (PSM), the former SBP chief said the decisions have had a negative impact on the country’s economic development.

About the LNG case, Dr Hussain said the government received several bids but they could not proceed further due to the court’s intervention, adding that there is a need for expeditious disposal of suo motu cases related to economic issues.
Similarly, commenting on SC’s judgment in the PSM case, he said the country has not carried out a single transaction of privatisation since the decision.
The former central bank chief said the court judgments have instilled fear among the civil servants and political leaders for putting out any public assets for sale to avoid judicial intervention.
Lastly, taking a swipe at the judicial activism, Dr Hussain said the court’s interference in the appointments, promotions and terminations was hampering the operations of civil services.
Treading a cautious line, the former state bank governor said, “Let me submit with all the humility and without sounding arrogant or offending anyone’s sensibilities, that economic decision are highly complex and its repercussions are interlinked both in time as well as space.”
He recommended that laws related to Land Revenue Act needed to be updated, in accordance with modern demands of agro business, industry, commerce, infrastructure, etc.
The former SBP chief also stated that the disposal by the banking courts was 23,694 against a total of 68,973 outstanding cases which was lower than the disposal rate by all special courts and Administrative Tribunals.


http://tribune.com.pk/story/697952/international-judicial-conference-economy-suffered-due-to-judicial-intervention-says-ishrat/
Riaz Haq said…
#Pakistan fined $5.9 billion over #RekoDiq contract breach. The mine has gold reserves estimated at $100+ billion. #China may make a bid to take over the #gold mine project and pay the penalty in return for long-term lease and exclusive mining rights. https://asia.nikkei.com/Politics/International-relations/China-rescue-option-emerges-as-Pakistan-slapped-with-5.9bn-fine

The possibility of Pakistan seeking assistance from China is emerging after the government was slapped with a $5.95 billion fine in a legal dispute over rights for a copper and gold mine in the country.

Tethyan Copper had filed a case against Pakistan with the International Court for Settlement of Investment Disputes in 2012 for violating an agreement that the company signed with Pakistan for exploration and mining of the Reko Diq mine.

The court issued its decision in 2017 in favor of Tethyan Copper, a joint venture between Barrick Gold of Canada and Antofagasta Minerals of Chile, with hearings continuing to determine the amount of damages to be paid by Pakistan. On Saturday, the court announced that the government of Prime Minister Imran Khan must pay a total fine of $5.9 billion -- a $4.08 billion penalty and $1.87 billion in interest.

Legal experts say Pakistan cannot appeal the court's decision and that it can only apply for technical review, whereby the government can ask the court to review the amount of damages. That process could take up to three years, which would offer Pakistan more time before the fine is due.

The amount of damages Pakistan has been ordered to pay is nearly equal to the recently approved bailout package from the International Monetary Fund.

The damages also are twice the amount of Balochistan's annual budgeted expenditures, which means Pakistan in all likelihood will have to look quickly for payment options. One of the strongest options, according to analysts, is its northern neighbor: China.

Reko Diq sits in Pakistan's southwest Balochistan province, at the triangular border with Iran and Afghanistan. The mine has gold reserves with an estimated value of more than $100 billion.

Work at Reko Diq has been suspended since 2011, when Pakistan rejected the application of Tethyan Copper to mine the area. Before that, Pakistan and Tethyan Copper agreed that the company would conduct a feasibility study under an exploration license and that it would apply for a mining license to carry out the mining.

The board chairman of Tethyan Copper, William Hayes, has said that his company is ready to enter a settlement for a mutually beneficial solution with Pakistan. That could pave the way for a third party like China to help settle the case.

"Given the ever-growing domestic consumption of gold in China and Beijing's interest in investing in gold and copper mining industries abroad, I won't be surprised if China makes a bid to take over the Reko Diq gold mine project and offers to pay the penalty in return for long-term lease and exclusive ownership rights," said Mohan Malik, a professor at the Asia-Pacific Center for Security Studies in Hawaii.


Riaz Haq said…
World Bank ruling against Pakistan shows global economic governance is broken


http://theconversation.com/world-bank-ruling-against-pakistan-shows-global-economic-governance-is-broken-120414


The International Centre for the Settlement of Investment Disputes was established in 1966 as part of the World Bank Group. The centre oversees arbitrations between foreign companies and states in a process known as the investor-state dispute settlement (ISDS).

ISDS is hugely controversial for a variety of reasons ranging from the secrecy of the hearings to the substantial costs associated with defending a claim and the ability of corporations to challenge health and environmental measures.

The case that cost Pakistan $5.8 billion did not revolve around such measures but rather the decision of a provincial government to backtrack on a sweetheart deal that had been offered to a mining firm, allegedly the result of corruption. Leaving the merits of the case to one side — it is difficult to assess the tribunal’s reasoning when the award isn’t public, after all — let’s take a closer look at the payout.

According to the mining company — Tethyan Copper, partially owned by Canada’s Barrick Gold — it spent US$220 million on exploration activities before things went south. One might argue that a fair outcome, if the government was solely to blame, would be for the award to cover these sunk costs. Instead it was more than 25 times that amount. That is because the tribunal chose to award the company “lost future profits” from the project.

Arbitrators don’t have crystal balls. They don’t know what the value of a mineral will be in a year, let alone 30 years. And they are lawyers, not market analysts. So how do they decide how much profit a firm would have made in a hypothetical alternative future?

The answer is, partially, that they rely on “experts” brought in by each of the parties to the dispute. These experts provide a best guess for what they think a project is worth. International law scholar Robert Howse calls this “junk science.”

Unsurprisingly, the state’s expert often provides a low-ball estimate for the value of a project and the investor’s expert gives an inflated value. Faced with this discrepancy, arbitrators will often choose to go down the middle and pick an arbitrary value. Tethyan Copper had originally sought more than US$11 billion in damages, suggesting that the tribunal in this case may have taken this approach.

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