0 .Seminar

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Executive Director

Saad Rashid

Trustees

Syed Adil Gilani Chairman

Arshad A. Zuberi Secretary

Khurram S. Abbas Treasurer

Yasmin Lari Trustee

Justice (R) Haziqul Khairi Trustee

Justice (R) Dr. Ghous Muhammad Trustee

Engr. M. A. Jabbar Trustee

Mr. Sohail Muzaffar Trustee

Mr. Javed Farooq Trustee

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“Corruption in the Private Sector – Causes & Remedies”

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Contents

Executive Summary……………………………………….04 Release in Pakistan/Reactions Introduction…………....04 Commitment given by GoP……………………………….07 Proceedings………………………………………………..08 Suggestions by Mr. Adil Gilani Chairman Transparency International Pakistan……………………09 Global Corruption Report 2009………………………….10

The Speeches Mr. Akber Sheikh Ex- Chairman All……………………..20

Pakistan Textile Mills Association. Mr. Ehsan Malik, Chairman Unilever Pakistan…......... 26 Mr. Sohail Ahmed Chairman FBR…………………….. 33 Mr. Khalid Aziz Mirza Chairman………………………... 40 Competition Commission of Pakistan Mr.Shaukat Tarin Minister for Finance, Revenue…….. 49 Economic Affairs & Statistics. Names of Attendees…………………………………........53

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Corruption in the Private Sector - Causes and Remedies

Executive Summary

Transparency International published the Global Corruption Report 2009 on “Corruption and the Private Sector” in June 09 and it was released in Pakistan on 23rd September, 09.

This is a worldwide report which contains information related to level of corruption in member countries and covers the period from 2006 to 2009. It also gives details about various incidences of corruption that directly influenced the country as a whole. The Corruption report 2009 also gives analyses of more than 75 experts.

Release in Pakistan/Reactions

The release of this report in Pakistan created a lot of ripples. Mr. Adil Gilani, Chairman, TI-Pakistan, in response to these accusations gave several interviews and also made references to TI-Pakistan’s press release of 23rd September 09 , which summarizes the report, including the situation in Pakistan and the problems existing therein .

Mr. Gillani also said, that anti-corruption efforts in Pakistan have taken a 180 degree turn since retired General Musharraf issued the National Reconciliation Ordinance on 5 October 07; 56 days after ratification of the UN Convention against corruption. Although most of the comments on Pakistan, in this report, relate to tenure of General Musharraf, spokes persons of the present government without properly going through the report and analyzing it in a fair manner, assumed it to be a comment on the present government’s performance and there by reacted, albeit, irrationally.Mr. Gilani said that, over and above the NRO, the aim of the present government, which has sent serious signals all over the world, is that in Pakistan corruption will not be a crime if no accountability is held for three years. The Draft Holder of Public Office Act 2009 prepared by the government to substitute the NAB ordinance gives further immunity against corruption

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from October 2010. Under the circumstances how can one expect any donor to assist Pakistan out of its current financial catastrophic state.

As Transparency International –Pakistan takes pride in its unbiased,non parochial,fair and transparent working and reporting,it was decided to conduct a seminar in order to clarify and put to rest the accusations from various quarters accordinlgy a Seminar was held on Oct 10th,09,in which Mr.Shaukat Tarin, the federal Finance Minister was the chief guest.

Objectives & Aims of the Seminar.

The Main objective of the Seminar was to present the true picture regarding Transparency International‘s Global Corruption Report 2009 and seeking the government’s views /commitments regarding the points raised therein.

The second purpose of this seminar was to try and find ways and means to remove obstacles hindering transparent working of the private sector, as, for the industrial and commercial growth of a country, the private sector has a major role to play as it is virtually impossible for the public sector to do it on its own.

Role of the private sector in Pakistan has fluctuated over the years because of policies of the government regarding privatization from time to time. Currently however government’s position is clear and stable and therefore we are seeing some reasonable increase of investments by the private sector. Furthermore, the World Bank’s Control of Corruption Indicator in 2007 ranks Pakistan a mere 21.3 out of 100. In terms of the business sector, there are a number of measures that indicate that there is a serious issue of corruption. TI’s Global Corruption Barometer 2006 reported that the impact of corruption on the private sector was perceived as almost equal to corruption in the public sector; and

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The Global Competitiveness Report 2008ń2009 ranked Pakistan 101st out of 130 countries and found that respondents pointed to corruption as the second most problematic factor for doing business in the country, after government instability.

Recommendations of TI-P and commitment to be given by the Minister of Finance

Rule of Law across the Board without discrimination in FBR.

MOF to stop funds of PPRA defaulting departments. TIP assures the Minister that if PPA Rules are applied

across the Board,it will generate 30%of Development Budget of Pakistan (FG,PG and Armed Forces),Rs1,500 Billion ,which comes to $5.5 Billion.

Commitment to be given by the Chairman CCP

action against abuse of dominance by a single business undertaking is collusive behaviour as is cartelization on the part of several undertakings.

prevention of competition-reducing mergers and acquisitions.

action against deceptive marketing practices. Trying to promote competition norms through means

other than law enforcement.

Commitment to be given by the Chairman FBR

Improve transparency in the decision making process in the field formations.

No action against a taxpayer would be taken without passing or registering the action through the system.

Taxpayers profiling and cross verification, online issuance of refunds, Composite Audit in collaboration with CA firms.

Audit of PACCS and all loop holes (if any) will be plugged in.

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Commitment to be given by the Minister of Finance

Enhanced disclosure and transparency of public sector

expenditure,particularly of defense spending.

The adoption of Medium Term Budgetary Framework(MTBF)under which budgeting by outcomes is being undertaken.

A move towards greater adoption and use of Public-

Private Partnership(PPP)models to reduce project cost overruns and delays,and to ensure greater efficiency of the Public Sector DevelopmentProgram(PSDP).

The strengthening of parliamentary oversight via a

quarterly presentation and review of budget and macroeconomic conditions to the relevant standing committees of the National Assembly and Senate. In addition, the leader of opposition in the National Assembly heads the empowered Public Accounts Committee.

The restructuring of the Federal Bureau of Statistics to

improve the accuracy, timeliness and credibility of official statistics; ‘the strengthening of AGPR and Auditor-General’ s offices;the placement of trained Finance Division staff in line Ministries, divisions and departments to improve fiscal discipline and financial governance by performing Chief Financial Officer (CFO)-type role; plans to restructure loss-making public sector entities such as PIA, Railways, Wapda and Pakistan Steel Mills;

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Introduction to the Seminar

The seminar began with an opening address by Mr. Syed Adil Gilani, Chairman Transparency Pakistan, on major issues regarding corruption and its prevalent practices in the Private Sector of the country. He emphasized the role of Transparency International Pakistan as an organization which scrutinizes corruption issues, brought to its knowledge by the public/Media and refers them to the concerned government agencies for redress

Proceedings

Mr. Gilani also spoke of the benefits of having a coalition with PPRA which has resulted in saving amount of 1.87 billion in the PQA in just one tender. He also suggested following of rules without any discrimination in FBR. He also asserted that Ministry Of Finance should immediately stop funds of PPRA defaulting departments. He stated that the cooperation between Transparency International Pakistan and PPRA can achieve a lot of success and assured that the savings can go up to 30% of the Development Budget of FY 2009-2010. This would amount to about $5.5 Billion.

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Suggestions By Mr Adil Gilani Chairman, Transparency International - Pakistan

Transparency to continue having a coalition with PPRA. There should be no discrimination between the Public

and the Private Sector following rules. The Ministry of Finance should immediately stop funding

the defaulters. Rental power Projects are not awarded according to

PPRA rules & declared by TI-P, shall be re invited, and Tip assures that in 1 month contracts will be awarded (at 50%cost against current 14 RPS’s to GoP as it shall be for 3 years and not for 5 years), and in 120 days RPP will start production .i.e. by Feb 2010.

Tax and Duty refund Billions of Rupees. Sugar Cartel Subsidy on fertilizers and other items. Pakistan Steel losses 32 Billion. Shershah Bridge accident and losses not recovered

from NLC. Recent savings in PQA by application of PPRA rules,

and TIP advices Rs 1,87 Billion in Rs 16 Billion the Dredging based on tendered conditions shall remain same after Bid opening in all situations.

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Global Corruption Report 2009 ,Corruption and the Private Sector Pakistan Report

Corruption Perceptions Index 2008: 2.5 (134th out of 180 countries)

Conventions ADB–OECD Anti-Corruption Action Plan for Asia-Pacifi c (endorsed November 2001)UN Convention against Corruption (signed December 2003; ratifi ed August 2007

Legal and institutional changes

● In a meeting with a delegation of TI Pakistan on 17 July 2007, the former prime minister,Shaukat Aziz, gave assurance that the Public Procurement Rules of 2004 would be implemented in all the federal government ministries. He also claimed that transparency was the ‘hallmark’ of government policy and that the government was promoting e-governances a tool for more openness and in order to make processes more efficient.1 He claimed that the ‘government had made it mandatory that integrity pacts are signed for all government contracts over Rs10 million’.2 Moreover, the adoption of the rules ‘minimizes discretion, gives priority to technical competence and ensures that award of contract is on the basis of lowest evaluated responsive bidder in the shortest possible time’.3 He also agreed with TI Pakistan that the Election Commission should ‘hold the elections in the most transparentmanner’.4 These commitments were undermined after the departure of the former prime minister in 2007. Under the caretaker government in 2008, complaints to the Public Procurement Regulatory Authority board were not acted upon.

● The former president, General Pervez Musharraf, issued the National ReconciliationOrdinance (NRO) on 5 October 2007, fifty six days after the ratification of the UN Convention against Corruption.5 In many ways this was a setback for anti-corruption

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Measures in Pakistan, as all proceedings under investigation or pending in any court that had been initiated by or involved the National Accountability Bureau (NAB) prior to 12 October 1999 were withdrawn and terminated with immediate effect. The NRO also granted further protection to parliamentarians, as no sitting member of parliament or a provincial assembly can be arrested without taking into consideration there commendations of the Special Parliamentary Committee on Ethics or the Special Committee of the Provincial Assembly on Ethics.

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Business Recorder (Pakistan), 19 July 2007; see www.transparency.org.pk/news/news.htm.

2 Associated Press of Pakistan, 19 July 2007; see www.transparency.org.pk/news/news.htm.

3 Ibid.

4 Ibid.

5 Business Recorder (Pakistan), 8 October 2007; see www.transparency.org.pk/news/news.htm.

6 Ibid.

Public ills, private woes: the survival of the private sector during political instabilityCorruption is a serious problem in Pakistan, and this position is corroborated by a number of recent studies and reports. An assessment of Pakistan’s infrastructure implementation capacity was carried out at the request of the government, and the resulting report was published in November 2007 jointly by the World Bank and the Planning Commission of Pakistan.7 It states that approximately 15 per cent of the cost of corruption lies in procurement, costing the Pakistani development budget (2007/8) overRs150 billion.8 Furthermore, the World Bank’s Control of Corruption Indicator in 2007 ranks

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Pakistan a mere 21.3 out of 100.9In terms of the business sector, there are a number of measures that indicate that there is a serious issue of corruption. TI’s Global Corruption Barometer 2006 reported that the impact of corruption on the private sector was perceived as almost equal to corruption in the public sector; and The Global Competitiveness Report 2008–2009 ranked Pakistan 101st out of 130 countries and found that respondents pointed to corruption as the second most problematic factor for doing business in the country, after government instability.10

The instability of the political situation in Pakistan cannot be underestimated as a factor in permitting corruption in the private sector to flourish. Despite Musharraf’s claim to be committed to fighting corruption, little headway has been made, and it is still considered to be ‘pervasive and deeply entrenched’.11

Musharraf relinquished military power in November 2007, and his supporters were defeated in the February 2008general election by a coalition of the Pakistan People’s Party and Nawaz Sharif’s Muslim League.Musharraf resigned in August 2008, facing impeachment for alleged crimes including gross misconduct and violation of the constitution.12The inauguration of the new president, Asif Ali Zardari, on 9 September 2008 ushers in a newera, but not one without challenges. The new democratically elected government will, therefore, require the immediate enforcement of good governance and transparency standards to counter the various dire problems facing Pakistan. There is an increased threat of terrorism, hyperinfl action, a reduction in the Karachi Stock Exchange 100 Index, a sizeable depreciation of the currency, 13 a substantial reduction in foreign currency reserves14 and a huge traded deficit inherited from the previous government.

Banking fines for cartels: the new Competition Commission In Pakistan, monopolistic practices and cartels are perceived to hold sway in such businesses as banking, cement, sugar, automobiles, fertilizers and pharmaceuticals, to name a few. Although World Bank, Pakistan Infrastructure Implementation Capacity Assessment (Washington, DC: World Bank, 2007).8

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Business Recorder (Pakistan), 24 September 2008; see www.transparency.org.pk/news/news.htm.9 Control of corruption is one of the indicators used in compiling the Worldwide Governance Indicators (WGI)project. The indicator measures the extent to which public power is exercised for private gain, including petty andgrand forms of corruption, as well as ‘capture’ of the state by elites and private interests.

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See http://info.worldbank.org/governance/wgi/sc_chart.asp#.10 TI, ‘Global Corruption Barometer 2006’ (Berlin: TI, 2006); World Economic Forum, The Global Competitiveness Report 2008–2009 (Geneva: World Economic Forum, 2008).

11 See www.business-anti-corruption.com/normal.asp?pageid=464.

12 Welts Online (Germany), 17 August 2008.

13 See www.fxstreet.com/fundamental/analysis-reports/emerging-markets-weekly/2008-11-17.html; ‘Lost 23 Percent against the Dollar This Year as a Balance of Payments Crisis Developed’.

14 US$16.4 billion foreign country reserves for October 2007; see The News (Pakistan), 13 June 2008; US$4.7 billion for October 2008; see Daily Telegraph (UK), 14 October 2008.

Cartels distort market prices, they also create other anomalies. Existing players in an industry may firmly block the entry of new entrepreneurs through cartels, in order to ensure their own market dominance. This practice acts as a clear disincentive for the much-needed expansion of Pakistan’s industrial base.

In October 2007 a new Competition Commission was set up under the Competition Ordinance2007, in order to ‘provide for a legal framework to create a business environment based on

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healthy competition towards improving economic efficiency, developing competitiveness and protecting consumers from anti- competitive practices’.

It was also meant to ‘restrict the undue concentration of economic power, growth of unreasonable monopoly power and unreasonably restrictive trade practices’, which are perceived to be ‘injurious to the economic well-being, growth and development of Pakistan’.16In one of its first initiatives, the Competition Commission challenged the Pakistan Banks Association (PBA) on its decision to ‘collectively decide rates of profit and other terms and conditions regarding deposit accounts’.17 The PBA is a membership association to which only banks.

In Pakistan can be affiliated, and it advertised its decision openly in a daily newspaper on 5th November 2007. The terms of the agreement included a number of its member banks imposing’ a 4 percent profit on Rs 20,000 deposits and a Rs 50 charge on less than a Rs 5,000 balance’ on bank accounts included in the new Enhanced Savings Account (ESA) scheme.18 Furthermore, holders of basic accounts that met the criteria would have their accounts changed to ESA’s without the prior instruction or agreement of the account-holders.

The Competition Commission considered this move by the PBA to be in violation of section4 of the Competition Ordinance 2007, and, moreover, in acting as a cartel, the banks were alleged to have behaved anti-competitively. The implications of the changes included customers with balances of less than Rs 5,000 having to pay Rs.50 each month and the transfer of accounts without the account-holders’ prior permission.On 24 December a ‘show cause’ was issued to the PBA and the banks, and they were asked to provide justification of their behavior to the commission by 10 January 2008.19

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Both the PBA and the banks issued responses on9 January, denying the charges of cartelisation,and on 28 February 2008 a further statement was issued, arguing that the commission did not have jurisdiction in this area and that, furthermore, the changes had been made ‘at the behest of the regulator [the State Bank of Pakistan] in the larger public interest’.20 The PBA also argued thatit could not be considered to be stifling competition the deposit amounts affected by the ESA scheme amounted to only 2.25 per cent.

The commission found later, however, that in terms of the number of account-holders affected the impact was much higher, constituting 45.12 percent.21The final decision of the Competition Commission was made on 10 April 2008. The commission argued that the ‘PBA has acted beyond its mandate and has been instrumental in the formation of a cartel’.22 As a result,it had deprived small-holdersof the benefits they were otherwise earning on their savings accounts.

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15 See www.mca.gov.pk/.

16 See www.mca.gov.pk/law.htm.

17 See www.mca.gov.pk/Downloads/Order_of_Banks.pdf

18 Business Recorder (Pakistan), 13 February 2008.

19 Competition Commission of Pakistan; see www.mca.gov.pk/Downloads/Order_of_Banks.pdf.

20 Ibid.

21 Ibid.

22 Ibid.

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Found at all stages, from the evaluation of profits and assets of a company to the provision of kickbacks on completion of a settlement. One of the most famous cases relating to privatization involves the attempted privatization of Pakistan Steel Mills. As Pakistan’s largest and only integrated steel manufacturing plant, it is a private limited company, and 100 per cent of its equity is owned by the government.26 The plant is the biggest producer of steel in Pakistan and was installed in 1981, with the collaboration of Russia, by the Ministry of Industries, Production and Special Initiatives. In 1997 the government of Pakistan decided to privatize it, and, following the rules, secured approval from the Council of Common Interests.27

In 1998 the privatization of Pakistan Steel Mills was abandoned, and to make it profit table the labor force was reduced from 20,000 to 15,000.As the steel mill had been designed, constructed and fitted out entirely by the Soviet Union, in February 2003 General Musharraf visited Moscow and signed an agreement to expand the production of the plant’s steel from 1.1 million to 1.5 million tones. By December 2004, less than two years later, the privatization of the plant was being discussed again, and by 10

February 2005 the decision to privatize the mill was taken by the government. The corporation, assessed at Rs72 billion, was sold to a consortium for Rs21.58 billion on 24 April 2006.28

On 23 June 2006 the Supreme Court ruled against the privatization, and Chief Justice Chaudhry prevented the sale of the state monopoly to the result, it had deprived small account-holders of the benefits ts they were otherwise earning on their savings accounts. The PBA and the culpable banks were ordered to discontinue the practice, not to repeat it and to pay considerable. The PBA was fined Rs 30 million, and the seven banks involved were fined Rs 25 million each.23

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The penalized institutions did have recourse to appeal to the appellate bench of the Competition Commission, but they failed to do so within the stipulated time. On 27 May the PBA did, however, appeal against the decision of the commission with the Sindh High Court, which ordered the commission not to take any action against the PBA before the decision had been adjudicated in court.24The commission appealed against the High Court’s decision, and on 15 September 2008

The Supreme Court allowed the commission to proceed against the banks.25 The Competition Commission’s move against the banking cartel, as well as the support provided by the Supreme Court, is encouraging. It has sent the message that such practices by the private sector, including the maintenance of unreasonable power by monopolies and restrictive trade practices, will not be tolerated and that the institutions in charge of monitoring such practices have the power to act.

Privatization: Pakistan Steel MillsCorruption in privatization in Pakistan is endemic: manipulation of the process can be

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23 Ibid.

24 Dawn.com (Pakistan), 16 September 2008.

25 Ibid.

26 Judgment of the Supreme Court in Pakistan Steel Mills PrivatizationCase,9August2006;see www.dawn.com/2006/08/09/tab.pdf/.

27 This is a constitutional body, with a mandate for resolving inter-provincial inequalities and potential disagreements.The members are made up of the chief ministers of the provinces and a number of members nominated by The federal government.

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The council did not function between 1998 and 2006, when it resumed its work to decide on the privatization of Pakistan Steel Mills.28 Business Recorder (Pakistan), 18 August 2006.

Private investors.29 The Supreme Court concluded that approving the award of the contracture elected disregard for the mandatory rules, as well as the information necessary for arriving at a fair sale price.30 the unexplained haste of the proceedings also cast reasonable doubt on the ethics of the whole exercise. While Chief Justice Chaudhry acknowledged that it was not the function of the court to interfere with the policy-making of the executive, the privatization the mills was ‘vitiated by acts of commission’ and violated the mandatory provisions of laws and rules.31 The valuation of the project and the final terms offered to the consortium were not in accord with the initial public offering given through the advertisement.32

This case had implications that still resonate to day, as it is considered one of the causes of the dismissal of Chief Justice Chaudhry in March2007, who was not reinstated until July 2008.It is, therefore, partially responsible for a great civil society movement in Pakistan, which called for the restoration of an independent judiciary.

There are also unanswered questions that still need resolution. In October 2006 a case was filed against the then prime minister, Shaukat Aziz,and ten other ministers, as well as the governor of the State Bank of Pakistan, alleging misuse of power – corruption as defined in section 9 of the National Accountability Bureau Ordinance1999, which covers corruption and corrupt practices.33 If found guilty, they would be subject to punishment, up to fourteen years’ imprisonment, under section 10 of the ordinance for their Involvement in the attempted privatization of Pakistan Steel Mills.34 At the time of writing this report it was yet to be seen how the NAB, under the jurisdiction of the current government, will proceed with this case.35

Syed Adil Gilani (TI Pakistan)

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Additional Reading

Human Rights First, Pakistan Courts and Constitution under Attack: Reversing the Damage(New York: Human Rights First, 2008)M. Iqbal, Global Integrity Scorecard: Pakistan(Washington, DC: Global Integrity, 2008).S. Nishtar, Pakistan’s Health Sector: Does Corruption Lurk? (Islamabad: Heart file and TI, 2007).M. Sohail and S. Cavill, ‘Does Corruption Affect Construction?’, paper presented at the Developing Countries International Symposium ‘Construction in Developing Countries: Procurement, Ethics and Technology’, Port of Spain, Trinidad and

Tobago, 16 January 2008. TI Pakistan: www.transparency.org.pk.

29 Ibid.

30 Judgment of the Supreme Court in Pakistan Steel Mills PrivatizationCase,9August2006;see www.dawn.com/2006/08/09/tab.pdf/.

31 Ibid.

32 Ibid.

33 See www.sbp.org.pk/l_frame/NAB_Ord_1999.pdf.

34 Ibid.

35 See www.ppp.org.pk/refs/ref0613.html. According to The News (Pakistan), 19 January 2009, the NAB will be replaced by a new independent accountability commission, which will pursue all cases fi led with the NAB, including those relating to Pakistan Steel Mills. See also The News (Pakistan), 12 January 2009.

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Engr. Akber Sheikh Ex- Chairman All Pakistan Textile Mills Association (Punjab)Ex- Chairman All Pakistan Contractors

Association. Member Governing Body, Pakistan Engineering Council and Convener PEC Construction

Industry Regulation Committee

CORRUPTION AND PRIVATE SECTOR: REVIEW OF POLICY IMPLICATIONS

I have been asked to speak on the corruption and private sector.My submission is that corruption is always a public-private joint venture and seldom just private sector or public sector corruption.

We all know the causes of corruption. Apart from pure greed, it is caused by discriminatory application of law, intentional or due to lack of writ or capacity. Discriminatory application or just fear of discriminatory application of law leads to multitude trying to evade the law, to protect their respective comparative position.

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Evasion of law also arises out of loss of moral authority of the government. People can be forced into evasion because of threat to their survival. Whether it is expensive sugar or electricity or a collapse in economic feasibility of the businesses, when the day to day survival of an individual or a business is threatened, desperation leading to theft and evasion is the ultimate outcome. Finally, when people see no or insufficient benefit of compliance, as is generally the case in our country, evasion is the outcome. Several variations of the causes I have mentioned may exist. There can be policy issues, also, which knowingly or unknowingly, promote the perception of discrimination, collusion, inefficiency and diminishing return leading to evasion. I would like to spend some time on the policy issues that are causing distress among business circles. This distress eventually leads to evasion. I mention these issues because this is where Transparency International can play a constructive role.Competitiveness is the soul of survival in today’s globalized world. Competitiveness is born out of competition, free and fair. Nothing kills competitiveness faster than unfair competition and cartelization. Our economy is full of both phenomena.

Cartelization is mother of all evils and Pakistan’s economy is full of cartels. Cement, Sugar, Banking, LPG, polyester fiber, oil companies, etc. There are many more. For example, Polyester Staple Fiber manufacturers Group identified and moved against by CCP was let out with only a warning. Unfortunately the warning, instead of acting as a deterrent has emboldened the cartel which has added protective duties to its margins. We request that CCP be allowed and encouraged to continue its pursuit as lack of competition leads to lack of competitiveness which, in today’s world in non sustainable.

Subsidies at the cost of competing sectors in the economy create distortions in the economy. Textile policy calls for Rs. 4.5 billion subsidy to PTA, of which there is only one manufacturer in the country with only 200 jobs. Compare this with about Rs. 3 billion concession to spinning sector of which there are about 400 Mills with 400,000 jobs. On the other hand import of polyester Fiber is subjected to import duties and anti dumping

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duties which are not debatable and therefore defeat the government commitment of zero rated exports while destroying a major job creating sector of textile chain. We submit that subsidy in PTA chain be diverted to PSF manufacturers and import of PSF be allowed without any duty. Without this adjustment, textile export targets cannot be achieved. This chain should be looked into by CCP or TIP.

Similarly, Industrial sector of the country is being made to subsides the gas tariff of other sectors to the tune of Rs. 30 billion annually. Industry is waiting for fulfillment of promise by the Finance Minister for eliminating cross subsidy built into the industry’s gas tariff. That is an important policy issue.

Existence of monopolies may be a necessary evil. Our utility companies are examples of such monopolies. Such monopolies have to be regulated through regulatory bodies. We have agencies like OGRA, NEPRA etc. Unfortunately, in public’s mind, neutrality of these agencies is being compromised. Public interest is also compromised by exclusion of major cost components from public view. Thus while distribution costs and margins of gas and electric utilities are reviewed by OGRA and NEPRA, generation and production costs, which are more than 80 percent of what you and I pay are beyond public purview. Result is that while for thermal power generation, new technologies in the world have 70 percent thermal conversion efficiency, PEPCO power generation has a cumulative thermal efficiency of about 25 percent. Also, while private power plants in Pakistan are being set up at Rs.15 and 18. Per unit, India is setting up private power plants with imported coal at less than Rs. 4 per unit. We submit that electricity generation cost calculation be opened for public debate. Our economy has a tax to GDP ratio of less than 10 percent. The government will tell you that this is root of all evils. At today’s GDP, increase of one percent of GDP in tax collection would yield an additional Rs 130 billion. Federal government will spend about Rs. 2500 billion in current financial year. Add to this the amount that will be spent by provincial governments and government controlled corporations. That is perhaps another 2500 billion rupees. An increase in efficiency of return of 5 per cent of government

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controlled expenditure would mean an extra Rs 250 billion, almost 2% of GDP. Ten percent will mean 500 billion. A world bank report says that improper procurement procedures by government agencies may be causing a loss of about 15 percent of procurement value. What should take priority, increasing efficiency of government expenditure or increasing revenue from an already sick economy. Perhaps both are equally important. We submit that greater emphasis should be placed on governance efficiency and austerity. In these recessionary times, industry which is already paying taxes at a ration much higher than its GDP share, should not be harassed for increasing revenue.

We must admit that the government is making sincere efforts towards improving transparency and efficiency of its expenditure. Establishment of Public Procurement Regulatory Authority in 2002 was a huge step in this direction. Capacity building in Planning commission establishment of Project management units, privatization, public private partnership are all steps in right direction. Still, much remains to be done and agencies like Transparency International have a constructive role to play.

Setting up of PPRA in 2002 and notification of Public Procurement Regulations and Rules 2004 and 2008 were for the purpose of transparent procurement based on merit, quality, economy and efficiency. As I am a member of the governing body of the Pakistan Engineering Council and Chairman of its committee entrusted with the task of Construction Industry Regulation, I would point out an area of major concern for me. Pakistan Engineering Council has issued standard bidding document for construction work. These documents have been endorsed by the Planning Commission and subsequently by ECNEC. PPRA rules of 2008 have made it a requirement to follow these documents. Unfortunately, these rules are still not being followed diligently by most of the departments. Among provinces, Sindh and Punjab governments have adopted PPRA regulations. Other two Provinces are yet to follow the suit. TIP should be congratulated for the efforts they are making for implementation of PPRA Regulations and also providing capacity building services, free of cost.

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I express my gratitude to the Sind & Punjab Governments for this progressive step. Several Federal government corporations also do not follow the regulations, either willfully or due to lack of awareness. We recommend that all the provinces should adopt PPRA regulations and all procurement by Federal Government, Provincial Governments and government departments and corporation be subject to PPRA regulations.Discrimination in procurement is unfair competition and is detrimental to competition. It erodes competitiveness and stunts development of viable and alternative sources.

Award of construction or consultancy work to government and semi government agencies without fair competition should be treated as Miss-Procurement under rules.Inconstruction sector, agencies like NLC, FWO and NC are awarded work without matching requirements of bank guarantees for Bid bond, Performance Bond, retention money, CAR Policy, insurance cover and income tax deduction. These practices are not allowed under PPRA Rules and are also unfair to the private sector competing for the same work but causes loss to national exchequer. We request CCP to take notice of these anti competition practices.

The oft cited argument that certain armed force based agencies do better work is the same argument that holds military rule to be more efficient than democracy. Champions of democracy fall in the trap of this false impression. Short cuts to improvement are not sustainable and impede development of open markets.

We submit that government agencies should not participate in tenders unless necessary from a strategic point of view and when they participate a level playing field and fair opportunity to compete should be available to all participants. We request the Minster of Finance to take notice of violations of PPRA ordinance, which are causing loss to the national exchequer, and take steps to stop funds for all such procurements.

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In our country, organizations set up to meet a country’s strategic and social needs have become real estate developers. This unwelcome development needs to be looked into. When governments, federal or provincial, start acting as property developers, regulations built into the system get violated and unfair advantages are granted to favorites without an adequate competitive process.

Lack of domestic capacity is often an excuse used to bestow favors on the foreign players. Given the will, most of the time way can be found to ensure domestic participation which leads to domestic capacity building and retention of profits within the country. It is also more cost effective. We submit that award of work to foreign companies should only be a choice of last resort. We request that a committee of Planning Commission or PPRA be asked to assess the need for awarding work to foreign companies and provide guidelines in this regard.

Given the enormity of task before transparency international, the burden of responsibility is also huge. The sensitivity of the subject, specially from international perception point of view, requires that the interaction with the government, it’s agencies and private businesses, should be undertaken with utmost discretion. Misinterpretation by the media must be avoided.

Also, TIP should enhance its own capacity. Often the subject at hand is complicated and multi faceted and its handling requires high level of expertise. I hope with time these considerations will be taken care of

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Mr.Ehsan Malik, Chairman, Unilever Pakistan

CORRUPTION AND THE PRIVATE SECTOR – CAUSES AND REMEDIES

Mr. Shaukat Tarin, Federal Minister of Finance, Mr. Khalid Mirza, Chairman of the Competition Commission of Pakistan, Mr. Suhail Ahmed, Chairman Federal Board of Revenue, Mr Salman Siddiqui, Federal Finance Secretary, Mr. Arshad Zuberi, Trustee, TI Pakistan, Ladies and Gentlemen, Assalam Alaikam. I have

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been asked to give a private sector perspective on corruption. This is a very wide topic so in the limited time I have, I will cover some key issues from the experience of my company Unilever Pakistan, which I have the privilege of heading. I will try and give some perspective, approach the issue of corruption from a combination of macro and micro lenses and suggest some remedies.

Unilever Pakistan is a subsidiary of the global FMCG company Unilever which operates in some 90 countries and presently derives 45% of turnover from the Developing and Emerging Markets. We have been operating in Pakistan since the country’s inception 63 years ago and are better known by our brands such as Lux, Lipton, Lifebouy, Sunsilk and Walls, brands that are household names. Our annual turnover is Rs. 34 Billion and that makes us the largest consumer products company of the country. Last year we paid Rs.9 Billion in taxes of one form or another. That represented over 60% of the value generated by the business. The company employs about 1,500 directly and some 5,000 indirectly. We operate 4 factories.

The first issue of corruption or malpractice that I want to highlight results from a combination of four factors:

First, a high incentive to evade duties and taxes; Second: weak controls, coupled with lack of willingness to implement them; Third: Pakistan’s porous borders; and Fourth: an illogical framework.

The aforementioned factors combine together to cause a loss to the national exchequer of Billions of Rupees. Besides it damages Pakistan’s manufacturing base. I am referring to the misuse of the Afghanistan Transit Treaty, commonly referred to as ATT. I said earlier that I would confine myself to specific experience of my business, so I will talk about tea, which is one of many items that are smuggled into the country under the guise of ATT. Other notable items are tyres, battery cells, safety razors etc., on which I am not qualified to speak.

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Virtually every second cup of tea drunk in Pakistan is now made out of smuggled tea. Pakistan has a population of 170 million. On the basis of established research, Pakistanis consume a Kilo of tea per person per annum. That means, Pakistan’s annual requirement of tea is 170,000 tons. Yet official statistics show barely 100,000 tons being imported. Where does Pakistan obtain the remaining 70,000 tons of tea? Afghanistan has a population of 30 million. Using its consumption rate, it requires 18,000 tons of tea annually. Yet last year about 85,000 tons of tea were imported, ostensibly for Afghanistan. You would have guessed where the surplus tea went.

The incentive to evade taxes and duties on tea is high and amount to approx. Rs. 100,000 per ton, so the total evasion stands at Rs. 7 Billion for tea alone. The administrative and physical controls over movement of tea through Pakistan into Afghanistan are so poor that the majority of containers are destuffed in Karachi. Often empty containers travel up to Afghanistan and then back to Karachi. Seals are manipulated; part of the Rs. 7 Billion evaded is used to pay people off and some of it is used to incentivise retail outlets through higher margin to sell it in preference to the officially imported tea. The ridiculous thing is that Afghanis don’t drink black tea, they drink green tea. Pakistanis predominantly drink black tea. Pakistan allows black tea to be imported for Afghanistan, which is then smuggled into Pakistan.

The Rs. 7 Billion of loss I mentioned does not include income tax that is evaded by smugglers. Nor does it include the tax that retail outlets evade through lack of documentation. It certainly does not include impact on jobs in the manufacturing sector. Unilever had to close a factory last year because, like other branded official importers, we lost volume and could not sustain it.

Another consequence of allowing misuse of ATT to continue is the encouragement it gives to the havala trade. Imports under ATT have to be paid for in foreign exchange. This is procured from the unofficial havala system by offering a premium over the official rate. This premium is funded from the Rs. 100,000 per ton

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of duties and taxes evaded. Thus it becomes a virtuous cycle for smugglers and a vicious cycle for the government that wishes to encourage official remittances.

The remedy, at least for tea is to restrict import under ATT to green tea and set a quantitative limit commensurate to Afghanistan’s consumption. The much touted rationale for not offending Afghanistan by placing restrictions on ATT is that Pakistan wishes to use Afghanistan to reach the Central Asian markets. Whilst we allow everything under the sun to move through Pakistan, Afghanistan places severe restrictions on what can move though its territory. It also charges duty, which is refunded after much delay. Incidentally, India has a transit treaty with Nepal where similar restrictions apply.

The alternative of reducing duties and sales taxes (and hence the incentive to evade) would result in loss of revenue to the Pakistan exchequer. Therefore it is not recommended. Indeed by putting black tea on the negative list for ATT, Pakistan government would benefit to the tune of Rs. 7 Billion. We would also achieve a level playing field in that unfair and illegal competition would be eliminated. It would promote documentation of the economy and general transparency. Most important, it would strengthen Pakistan’s manufacturing base which otherwise is being eroded.

We at Unilever are sometimes asked, if the government won’t or can’t fix the blatant misuse of ATT, why don’t we join “the system” and start exporting tea to Afghanistan, then claim duty drawback and allow it to be smuggled back into Pakistan and sold without sales tax or other levy? The answer is simple. Integrity and ethical practice underlines everything we do. Our Code of Business Practice is very clear. We don’t evade taxes, we don’t bribe people and we obey both the letter and spirit of the law and we compete fairly but rigorously. Moreover we are committed to sustaining local production and maintaining the distribution system we have built over many years.

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However, everyone in the tea business does not have the stamina or resources to resist temptation to join the system. Indeed the danger of letting anomalies remain unchecked for long periods of time, as they have been in the case of ATT, is that exploiting them becomes acceptable and the norm rather than the exception and the distinction between right and wrong gets blurred.

Another issue affecting the consumer goods industry generally and us in particular is rampant counterfeiting of branded products. I say us in particular because the more successful the brand, the greater the incentive to counterfeit. In tea counterfeiters put saw dust and gram husk into packets with our brand names. In shampoo bottles they add coloured water in cream jars they fill substance of doubtful benefit. Of course counterfeiting can be life threatening as in the case of medicines. The private sector employs security companies to conduct raids on suspects. Unfortunately, most culprits are able to evade justice by buying their way out. In the meantime consumers suffer, producers lose revenue, government loses taxes and many jobs are lost. The remedy is to gear up the legal system to fight this menace. Again its one of those things, that if unchecked, becomes acceptable. We have a whole market in Lahore called the Shah Alami market that thrives on counterfeit and smuggled products. By allowing markets and shops like these to thrive, corruption is encouraged and legitimate business, discouraged.

Consistent implementation of policies and level playing field is far more attractive to investors, be they local or foreign, than fiscal incentives. The primary attraction of Pakistan to foreign investors is its large market of 170 million and a growing middle class. However, when exceptions are made, as in a recent case where only one player in our industry has been offered fiscal benefits, the message that goes across to Head Offices of multinationals is that in Pakistan it is possible to manipulate rules to suit favoured players. This is very unfortunate as it makes it very difficult for Pakistani managements of MNCs to obtain scarce investment funds from parent companies.

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I mentioned earlier that Unilever operates in 90 countries and derives virtually half its turnover from the D&E markets. In large part of the D&E markets, and Pakistan is not an exception, we are challenged by requests for bribes, speed money and dire business and personal consequences if we fail to comply.

I am proud of the way that companies like Unilever have been able to resist such pressure. We spend considerable time and effort in training our people and business partners on our Code of Business Principles. This code is uniform and applies in Asia and Africa as much as it does in Europe and Americas. There are no double or multiple standards. All levels are accountable. There is a whistle-blowing system which works through telephone hotlines staffed by independent, operators who can speak Urdu. All complaints are thoroughly investigated and results escalated to the very top. After many years of following this Code in letter and spirit we find that the requests for bribes etc., have gone down significantly. So the payback is already evident.

I will now turn to TI Pakistan’s proposals to curb corruption.

TI Pakistan believes that there should be minimal or no contact between public officials and the private sector, that IT systems should be deployed to process clearance of goods and tax returns, that importers and tax payers should be picked at random for audit using such systems, power of discretion should be curbed if not eliminated and that audits should be conducted by independent experts. TI Pakistan is firmly of the opinion that this will reduce manipulation and corruption and reduce the time it takes to clear goods and resolve income and sales tax issues, all resulting in greater efficiency and lower cost of doing business.

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Recommendations of TI Pakistan

Customs

The Customs Administration Reform (CARE) under which the PACCS system was introduced to automate clearance of full-containers is an excellent system that not only speeds up clearance of goods, saving container rental cost but also enhances transparency and brings objectivity into how cases are selected for audit. 95% of consignments are allowed to be cleared within hours. 5% are chosen at random for audit. However as this reduces the scope for manipulation and corruption, ways are being found to circumvent it. In fact the Customs Team that designed PACCS has been suspended and made OSD. The intention seems to be to revert to the manual system which was rife with corruption and resulted in long delays. The system should not be allowed to be derailed.

Automated System of Refund in Sales Tax:

In 2002-2003, STARR was established by FBR to automate refund of sales tax by matching input and output tax of registered sales tax payers. However, again the system is not being allowed to operate efficiently and ways are being found to work manually around it. This results in delays and corruption. Besides, several refund scams have occurred. Manual intervention should be discouraged.

Income Tax

Income Tax Ordinance, 2001 is based on self assessment procedures. TI Pakistan recommends an effective, independent, competent and reliable audit procedure, based on automatic computerized system. The ERP Project of FBR shall be expedited. I hope that the present government will give these issues the attention they merit. It will require courage and political will and most of all stamina to sustain the effort.

Thank you.

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Mr. Sohail Ahmed, Chairman, FBR

CORRUPTION AND THE PRIVATE SECTOR – CAUSES AND REMEDIES

Ladies & Gentlemen, As-salam Alaikum,

Indeed, today’s topic is very important in the economic perspective and the productivity of a nation. Countries like Pakistan can benefit immensely if the public is more sensitized on this issue as there is a vast gap for improvement. The candid discussions that we witnessed today will definitely help all of us in fight against this menace more effectively. I will speak in more

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detail as to how today’s topic is so relevant to FBR and what we have done about this. However, before I focus on FBR, let me express my views on the issue that has been discussed so far.

The Transparency International’s Global Corruption Report 2009 is as usual a great contribution in the fight against corruption. As you all know, this year’s special focus was the issue of Corruption as it relates to the Private Sector (PS). The private sector plays a pivotal role in fighting corruption worldwide. This Report documents in detail the many corruption risks for businesses, ranging from small entrepreneurs to large multinationals. Bribery and corruption in business are not only costing countries billions of dollars in lost revenues, but are partly to blame for the global economic crisis. (as per the Transparency International) .

Today we have discussed how the corruption resulting from bribery, price-fixing cartels and undue influence on public policy is costing billions and obstructing the path towards real sustainable progress, how it constitute a destructive force that undermines fair competition, slows economic growth and ultimately undercuts a business’s own existence.

In my opinion it is more important for Business to have integrity than just ensure short term earnings or returns on investment. When reckless businesses engage in corruption, the consequences can be devastating. We all know, for example, how poorly constructed buildings cleared by regulators collapse with little or no earthquake. Such deadly consequences can bring about unprecedented harm. The private sector has a crucial role to play in preventing such outcomes, by operating with transparency and accountability wherever there is a profit to be made. In a market where prices could be fixed according to costs and reasonable profit margin, why should such devastations occur? Apart from this we have witnessed how the sheer economic power of some business sectors translates into cartels and hoardings resulting in disproportionate and undue profiteering and leverage on political decision-making. As a civil society, our failure to halt such instances will ultimately retard growth.

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Now coming to Private – Public corruption. In my personal opinion, the traditional approaches to analyzing and combating corruption are insufficient unless we make a case for greater emphasis on the private sector side of the corruption equation. As we have deliberated so far, the Private- Public corruption is of 2 types. One that of apparent necessity in the case of a small or medium entrepreneur who thinks he will not remain in business unless he vexes the palms of the public officials. The second type of corruption is that of greed where businesses create monopolies and cartels, pay money out of greed to win contracts and keep competitors out.

We cannot fight corruption by merely punishing mid-career bureaucrats alone. To fight both types of corruption, we strongly need governance reforms and the government is carrying out such reforms by revamping of its institutions and in this context you have witnessed the government’s political commitment and the role of donor agencies. Now to address bribery, the private sector needs to come forward. We need to focus on improving Private Sector’s participation in this anti-corruption drive through closer engagement with Chambers of Commerce and Business Associations as well as better integration of anticorruption and integrity standards into business ethics and guidelines for private sector.

FBR FOCUS

Now coming to FBR, I must say that it is no different than the rest of such agencies around the world. Mostly the Private-Public corruption here is that of petty corruption i.e. a speed money. However, unfortunately in the recent past, we have noticed unprecedented cases of criminal tax frauds running into millions of rupees. These frauds included evasion of taxes and duties as well as claiming of bogus refunds. No doubt our officials were involved in these deals but the principal beneficiary and initiator of such crimes was the private sector.

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Now let me show you how we have approached this issue. At present, there is a Tax Gap of Rs 700 billions per annum equal to 8 billion dollars as per World Bank. Our desired Tax to GDP Ratio is 15% whereas we are lingering around 9%. A major part of this lost revenue is on account of under payment of due taxes. For this we are working on strengthening our Institutional Capacity because corruption has a strong inverse correlation with Institutional Capacity which in turn has a strong direct correlation with Tax to GDP. So we look at corruption as a clear danger to tax revenues.

Look at this graph when we compare Pakistan with a set of

comparable countries:

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Here you can very well see that Pakistan is way behind and way under as compared to similar countries when we compare Pakistan’s Tax to GDP Ratio and Institutional Capacity with others. (the horizontal axis is that of Institutional Index).

Now when it comes to strengthening of FBR’s Institutional Capacity, we know through statistical analysis that a 1% increase in corruption index (i.e. decrease in corruption) will cause 0.43% increase in Institutional Capacity. Rest of the strengthening will come on account of other factors like training of officials, physical resources and use of technology. Put it in another way look at the following graph:

So, you can well imagine, how important it is for us to address this issue of corruption as it is eating away 43% of our Pie and our Tax to GDP Ratio entirely rest on improving our Institutional Capacity. If we do not address this issue, it will mean that we are playing with 57% of our team against 100% of odds to improve our Tax to GDP Ratio.

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Again if we compare Pakistan’s Tax to GDP Ratio with its comparable counterparts with reference to the Corruption Perception Index of the Transparency International, we find the following situation:

As you can see, the Tax to GDP Ratio will drastically improve if Pakistan moves up the Corruption Index on the Right hand side on the trend line. You can also see that Pakistan is again way under and way behind on this chart.

We are trying to improve transparency in the decision making process in the field formations. We are establishing a system whereby no action against a taxpayer would be taken without passing or registering the action through the system.

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Sales Tax Automated refunds, Taxpayers profiling and cross verification, online issuance of refunds, Composite Audit in collaboration with CA firms are all steps that we are taking towards making the system of taxation more transparent. We are conducting system audit of PaCCS and let me assure you that all loop holes (if any) will be plugged in. But again, the Private Sector through its Chambers and Associations will have to come forward and set a moral standard for its members to stop them from inventing new and novel ways of evading duties and Taxes.

I assure you that the Transparency in FBR will continue to improve, the reforms already made and being carried on will not be reversed. We have already raised the pays and salaries of the FBR staff to a minimum living wage to address their problems. More will be coming.

I have taken note of the discussions made so far and the suggestions made in this seminar. In the end I thank Transparency International Pakistan for holding this important seminar. What we need is a societal change in our mindset- a change to dislike immoral and unethical behavior. I hope Transparency International Pakistan will continue to strive to achieve this ideal.

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Mr.Khalid Aziz Mirza Chairman Competition Commission Of Pakistan

Corruption in the Private Sector ─ Causes & Remedies

Mr. Shaukat Tarin, Finance Minister, ladies and gentlemen. I would like to first thank Transparency International and Mr. Syed Gilani for inviting me to speak at this seminar and given our current times, on a most relevant subject matter. It is indeed an honour and a privilege to be here to speak to such a distinguished gathering.

I’d like to begin with something that is probably completely untrue – basically remarks of a Pakistani taxi driver, named

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Ahmed regarding the Corruption Index. This was actually reported in the International Herald Tribune on September 12, 1997. Let me quote from this highly reputable newspaper:“'You know,' asked Ahmad the taxi driver, swerving around a crater that could have swallowed his little taxi, 'how Pakistan was No. 2 in the world in corruption?” Then he answered this rhetorical question. “ ‘Actually,' Ahmad went on, 'we were No. 1. But we bribed the Nigerians to take the first place’ ”

That was the situation in 1996 according to Transparency International (TI) and the good news is we are no longer the number two most corrupt nation in the world. The bad news, however, is that according to TI’s 2008 Corruption Perception Index, Pakistan is still number forty-four out of 180 countries and that places us directly in the 20th percentile.

Transparency International CPI measures the perceived levels of public-sector corruption ─ public-sector corruption is the enabler of corruption in the private sector which then corrupts the public sector and so goes the cycle, round and round.

Apart from this obvious, commonly understood and acknowledged perception of corruption in the private sector, perhaps a more damaging form of corruption in the private sector which is, in fact, pervasive in all spheres of commercial and economic activity is anti-competitive behavior or what the Americans call antitrust! And this is what I would like to talk about today.

I would like to cover five aspects:

(1)Essential features of Pakistan’s competition regime i.e., the competition law and role of the Competition Commission.

(2)The importance of the competition law and what the Competition Commission does in the context of economic betterment and consumer welfare. The support CCP needs.

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(3)The Competition Commission’s track record ─ what we have achieved.

(4)Cartels ─ the need to act against such collusive behaviour to achieve economic and consumer well being. (5)Steps taken by CCP in relation to the current sugar crises.

Pakistan’s Competition Regime

There are about 110 countries with a competition regime. Our law, the Competition Ordinance, 2007, is a modern piece of legislation inspired by principles embodied in the Treaty of Rome and global best practices. Our law is really at the cutting edge because we have benefited from what is called “late mover advantage” i.e, we have been fortunate enough to learn from the mistakes and successes of other jurisdictions.The law seeks to promote competition in all spheres of commercial and economic activity in order to, firstly, enhance economic efficiency, and secondly, to protect the consumer from anti-competitive behaviour.

The law makes reasonable provision for; ─

(i) action against abuse of dominance by a single business undertaking as also collusive behaviour or cartelization on the part of several undertakings;

(ii) prevention of competition-reducing mergers and acquisitions; and

(iii) action against deceptive marketing practices.

It further requires positive steps to create an awareness of competition issues and a culture of competition through advocacy and persuasion i.e., try to promote competition norms through means other than law enforcement.

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The agency to implement this law is the Competition Commission of Pakistan, which, perhaps can best be defined as a quasi-judicial, quasi-regulatory law enforcement agency. Apart from advocacy of sound competition norms, it has ample investigative authority, and after proper due process and adherence to accepted norms of natural justice, which are fully embedded in the law, it adjudicates and can penalize proven instances of abuse of dominance, cartelization, deceptive marketing practices, and non-compliance with the Commission’s orders.

Within an appropriate frame of reference, the Commission has been vested with the powers of a civil court and its proceedings are deemed to be judicial proceedings. It can also approach a court of competition jurisdiction for imposition of a custodial sentence of up to one year and an additional fine of up to Rs.25 million on those who disobey its orders.

The Law’s Importance/What CCP does?

If we are to depend on a market-based economy and the private sector as the engine for growth, an adequate competition law and its effective implementation are a must. Competition is at the core of the market system and without contestability, rivalry, and economic agents competing on a level playing field, productivity is bound to suffer ─ and so is the consumer.

All responsible governments around the globe rely on competition to deliver a more robust economy and to help drive economic growth. An important element of modern economic management is the institution of policies that harness the process of competition and eschew those seeking to subvert this process.

Lack of contestability and rivalry amongst economic agents, and their efforts to avoid and exclude competition, appears endemic almost throughout our economy. This is at the root of our economic ills because of which our productive efficiency has declined over the past decade or so. And it is due to this, that the

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economy has been intrinsically weak and simply got devastated by adverse exogenous factors a couple of years ago.

Competition and rivalry based upon quality and price allows for new competitors to enter into the market, increasing innovation, and creating jobs. More jobs mean more purchasing power in the hands of the masses, and as a result, the entire market size EXPANDS. It is a win/win situation.

The Government of Pakistan realizes the importance of competition and deserves to be commended for putting in place the Competition Ordinance, 2007, which is really a state-of-the-art law and has been globally acknowledged as such within the ICN i.e, the International Competition Network.

However, the Government does not seem to have fully understood the need to effectively implement the competition law, their appreciation of competition values appears weak, and occasionally their support for the Commission’s efforts seems indifferent, if not reactive.

We certainly need the support of the Government and its agencies. For example, implementation of provisions in the law to provide tied and secured sources of funding to the Commission is essential to ensure its financial autonomy. The political will of the Government must back the Commission for it to become truly effective.

We would also like the judiciary to appreciate that we are an independent public agency discharging onerous responsibilities vital to the functioning of our market-based economy in rather difficult circumstances, including the fact that it is often necessary for us to investigate and subsequently adjudicate cases involving rather powerful parties. Time and again, we have been issued stay orders simply against show cause notices issued by us upon writ petitions challenging the constitutional vires of the Commission.

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The Competition Ordinance provides for an efficacious and full right of appeal to the Supreme Court, and the Supreme Court is there to correct us if we err. This needs to be better appreciated for the smooth functioning of the Commission.

The Commission’s Achievements

Now, allow me to tell you a little bit about what we have managed to achieve in the 20 months of our existence:

First: the Commission has moved very decisively against cartelization in various sectors, collusive tendering, abuse of dominance, unacceptable concentrations, and deceptive marketing practices. The parties affected include several banks, cement companies, the largest refinery, the stock exchanges, cellular companies, a leading business school, a Government sponsored trust, several newspapers, a professional association, and two fertilizer companies held by an Army Trust.

Second: the Commission has examined and granted some 110 pre-merger clearances, including one that was taken to the second phase of examination; and further, about 200 potentially competition-reducing agreements have been exempted on grounds of economic merit, with and without conditions, under gateway provisions in the law.

Third: extensive and focused advocacy efforts were also undertaken, including active sessions of a Competition Consultative Group comprising representatives of sector-specific regulators, senior business and financial sector executives, academics, and media persons.

Fourth: so far the Commission has issued a total of five policy advisory notes to the Government and Government agencies, on various aspects of public policy and regulation, which were patently adverse to accepted competition norms. Remarkably, in four instances, the Commission’s viewpoint was either fully or partially accepted by the relevant Government department or agency. Apart from these policy notes, the Commission has also

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held open hearings and publicly announced its opinion with respect to two competition issues. One related to fixation of minimum retail prices at the behest of tax authorities, and the second was regarding discriminatory tax treatment favouring a particular category of undertakings in a sub-sector of the economy.

Fifth: structurally, the Commission has instituted an advisory service to assist business undertakings comply with the competition law, including an “Acquisitions & Mergers Facilitation Office” to provide advice with respect to the Commission’s merger clearance regime;

an “Office of Fair Trading” or OFT has been set up to address issues pertaining to deceptive marketing practices;

a comprehensive set of Frequently Asked Questions and their replies, as well as a variety of operational guidelines have been published; and

an “Informants’ Rewards Scheme” has been instituted to give cash rewards of up to Rs.5 million, payable in four stages, to “whistle-blowers”.

Sixth: the Commission has also issued its first report on the “State of Competition in Pakistan” which is essentially based on the Commission’s own experience of grappling with competition issues and its perspective of competition vulnerabilities.

Cartels

Now let me turn to the subject of cartels. Competition laws have been enacted in different jurisdictions for over 100 years, starting with the US Sherman Antitrust Act of 1890, and while these laws come in all sorts of hues, structures, and emphasis, certain standards and principles have gained universal acceptance. For instance, all these laws vigorously condemn “hard core” cartel agreements. Adam Smith, the father of modern economics, said in 1776 that if people of a trade meet even for merriment, the

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conversation is bound to end “in a conspiracy against the public or in some contrivance to raise prices”.

It is interesting that, in antiquity, the constitution of Zeno of the Far Eastern Roman Empire, in 493 AD, punished price-fixing with exile to Britain! It is also interesting that when the Commission was newly formed, the Pakistan Business Council in its position paper addressed to the Commission strongly recommended action against cartels as a priority. And, indeed, this is what the Commission has done albeit cartels, being conspiracies, are often difficult to prove.

A cartel is indeed in the nature of a conspiracy against the public being an agreement amongst economic agents to fix prices, contain output or quality, or restrict technological improvement. The US Supreme Court has described them as “the supreme evil of antitrust” and the European Commission as “cancers on the open market economy”.

May I say: it has been noticed in many jurisdictions ─ and we are beginning to notice this here as well ─ that, in a number of instances, trade associations degenerate into cartels or start “smelling” like cartels!

The Sugar Industry

This brings me to the travails of the sugar industry. We are in the middle of our investigation and this is likely to be completed soon. The inspection and search operation we carried out covering the three offices of the All Pakistan Sugar Mills Association has apparently revealed some interesting material which is under examination.

In addition to the concise statement filed by us we have also endeavored to assist the Supreme Court by filing the preliminary enquiry report received from the enquiry officers yesterday. While, a perusal of this report will reveal prima facie indications of collusive behaviour by the sugar mills, it will only be fit and proper for the Commission to wait for the final report, and it is,

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upon due consideration of the final report, that the Commission will be in a position to decide whether or not it would be fair and just to initiate proceedings.

Prior to this, we had already issued a Policy Note to the Ministry of Industries admonishing them for encouraging collusive behaviour on the part of the sugar mills and for acting against the letter and spirit of the competition law.

And before that we had also questioned the Vice-Chairman of APSMA ─ and the sugar mills ─ regarding his reported threat that the sugar mills would stop crushing “if the government does not stop its crackdown”. As it transpired he denied this statement and backed down. Individually, all the sugar mills have also stated that they did not subscribe to the reported statement. The threat ─ if it was there ─ was thus averted.

Concluding Remarks

Given our cutting edge law and the very near and long-term benefits to business consumers and retail consumers, it is imperative that our Ordinance is ratified as otherwise everything that we have accomplished thus far will be truly futile and our country’s economic productivity will continue to stagnate as it has for the past many, many years.

A variety of mafias and vested interests ─ which include some of the parties against whom we have acted or proceeded against ─ are doing their best to either effectively destroy the law or weaken the Commission. The big question is: will they succeed? I have seen in many countries that people against the competition regime are powerful and voluble whereas those supporting it are weak, lukewarm and very much less vocal. It is imperative that the media, the civil society, right-thinking business elements, and above all, our government, understand the benefits of this law to the country and our economy, and lend full support to the ratification of the Competition Ordinance, 2007 in its present shape & form and effectively implement it.

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Mr. Shaukat Tarin ,Minister For Finance ,Revenue ,Economic Affairs & Statistics

CORRUPTION IN THE PRIVATE SECTOR - CAUSES AND REMEDIES

Chairman, Transparency International, Pakistan, Mr. Syed AdilGilani; Distinguishedspeakers and participants: Ladies&Gentlemen, AssalamAklaikurn!

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It is a great pleasure for me to be here today as the chiefguest, and for the Ministry of Finance to be associated with this seminar ,Corruption is a scourge around the world. It has a direct bearing on the welfare — economic, social, and too often, even physical welfare — of hundreds of millions of people in the world, especiallyindevelopingcountries. Corruption distorts economic outcomes, moving societies away from first-best results. It subverts “property rights” defined in the broadest sense, and undermines “rule of law”, weakening the institutional edifice of

societies where corruption is endemic. By so doing, systemic and entrenched corruption over a sustained period can be expected to be accompanied by capital flight, a low rate of investment, and hence growth, in an economy, leading to the below-potential creation of employment opportunities.

In addition, countries plagued by high levels of systemic corruption can be expected to be performing poorly in human development. Corruption hurts the poor and vulnerable the most via higher inflation associated with sub-optimal policy choices, as well as higher costs and poor availability of social services and public goods. Hence, corruption imposes fundamental welfare costs upon society. Mindful of these real costs on .society, over the past few years, the Government of Pakistan, in conjunction with the effort of civil society partners such as Transparency International Pakistan, has tried to strengthen, admittedly with partial success in some areas, the institutional framework of economic governance in the country. Some of the major policy measures include:

The formulation and ratification by Parliament of the Public Procurement Rules 2004 aimed primarily at increasing transparency and accountability of public sector purchases;

Introduction of reforms at Federal Bureau of Revenue, with a view to reducing interface between taxpayers and taxofficials;

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The setting up of the Competition Commission of Pakistan to check anti-market and anti-competition practices; Despite these successes, much more needs to be done — and I am happy to report, the gaps are being addressed. Fundamental measures, many of which involve the Ministry of Finance, are being taken and include:

Enhanced disclosure and transparency of public sector expenditure, particularly of defense spending;

The adoption of a Medium Term Budgetary Framework (MTBF) under which budgeting by outcomes is being undertaken; • A move towards greater adoption and use of Public-Private Partnership (PPP) models to reduce project cost overruns and delays, and to ensure greater efficiency of the Public Sector Development Program (PSDP);

The strengthening of parliamentary oversight via a quarterly presentation and review of budget and macroeconomic conditions to the relevant standing committees of the National Assembly and Senate. In addition, the leader of opposition in the National Assembly heads the empowered Public Accounts Committee.

The restructuring of the Federal Bureau of Statistics to improve the accuracy, timeliness and credibility of official statistics; ‘The strengthening of AGPR and Auditor-General’ s offices; The placement of trained Finance Division staff in line Ministries, divisions and departments to improve fiscal discipline and financial governance by performing Chief Financial Officer(CFO)-typerole; Plans to restructure loss-making public sector entities such as PIA, Railways, Wapda and Pakistan Steel Mills;

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Finally, the Prime Minister has asked me to head a Fiscal Austerity Committee, which will recommend measures to improve utilization of taxpayer’s money and effectsavingsingovernmentexpenditure. Going forward, my aim as Finance Minister is to be 100% compliant with the PPRA rules in force, and with international best practice, in any tendering that my Ministry at least is involved in, and to try and ensure the same standards in overall public sector purchases and spending.

To this effect, I have always welcomed and appreciated the role of our civil society partners, in particular of institutions such as Transparency International Pakistan, in highlighting our weaknesses and areas of improvement. I hope we will continue to forge an ever closer partnership in achieving our common objectives of transparency accountability in both the public as well as the private sector.

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The list of Attendees

1) Mr.Shaukat Tarin Finance Minister to the Government of Pakistan.(Chief Guest)

2) Mr. Ehsan Malik Chairman Unilever Pakistan . 3) Mr. Khalid A. Mirza CCP 4) Mr.Akber Sheikh Ex Chairman all Pakistan Textile

Mills. 5) Mr.Sohail Ahmed Chairman FBR 6) Mr.Adil Gilani Chairman TI.P 7) Mr.Saad Rashid Executive Director TIP 8) Mr. Salman Asad Kayani Assistant Manager Finance

Transformation Unilever Pakistan. 9) Ms.Shaista Abbad FBR 10) Mr. Qadir,Abdul Nasir Butt, FBR. 11) Mr.Baloch,Mr.Suhail , FBR 12) Mr.Ahmed Chairman FBR 13) Mr. Ashfaq Ahmed Awan , FBR. 14) Mr. Fareed FBR. 15) Mr.Yasir Arafat Awaz TV. 16) Mr.FaisalButt, Awaz TV 17) Mr.Ali Awaz TV. 18) Ms. Shah Bano RTO. 19) Dr. Aslam Marri, Income Tax. 20) Mr.Shahid.H.Jatoi. Income Tax. 21) Dr.Mustafa. Income Tax. 22) Mr.Mehfooz-ur-Rehman Income Tax. 23) Dr.Abdu Sattar Pasha Income Tax. 24) Mr.AbdusSalam Income Tax. 25) Mr Suhail Ahmed. Income Tax. 26) Mr.Javed Iqbal Income Tax. 27) Mr.Ovais Jafar GEO NEWS 28) Mr.Raja Kamar GEO NEWS 29) Mr.Amjad GEO NEWS 30) Mr.Arif GEO NEWS 31) Mr.Adnan GEO NEWS. 32) Mr Shahid Rind, Samaa TV. 33) Mr.Amir Farooq, Express TV. 34) Mr.Irfan Ali, Express TV. 35) Mr. Faheemdudin Aziz Express TV.

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36) Mr.Mohuuddin Express TV. 37) Mr.Muhammad Hot FM 105 38) Mr.Liaquat Haider Hot FM 105. 39) Mr.S.Adeel.PTV. 40) Mr.Nasrullah.PTV. 41) Mr.Abbasi PTV. 42) Mr.S.M.Yasir ,AAJ TV. 43) Mr.Arif Siddiqui AAJ TV. 44) Mr.Shernawaz, Customs. 45) Mr.Rashid Sheikh Customs. 46) Mr.R.Tajammul.h.Chishti Naurus Pvt Ltd. 47) Dr.Mohammad .LARGE Tx Payer’s Unit 48) Ali.Khan Large Tax Payer’s Unit. 49) Mr.Zubair. 50) Mr.Ahmed Researcher. 51) Mr.Sohail Siddiqui Philips Pakistan. 52) Mr.Syed Asif Jamal Pakistan Textile Mills

Association. 53) Mr.Moonis Ahmed Daily Times. 54) Ms.Saadia Qamar. 55) Ms.Erum Zaidi The Nation. 56) Mr.Hadi. 57) Mr. Abbas Akber Ali 58) Mr.Ali Badruddin .Amreli Steel. 59) Mr.Kazm The Financial Daily. 60) Mr.Mian Mahmood DHA. 61) Mr.Raja Tariq Rehman FPCCL. 62) Mr.Shahid Aziz. 63) Mr.Wajid Jawad State life Insurance Corporation

Pakistan. 64) Mr.Ammad Ahmed Hyeworth. 65) Mr.Hafeez-ur-Rehman. 66) Mr.Rizwan Ahmed. 67) Mr.Khaqan Murtaza PPRA,Sindh. 68) Mr.Gulam Murtaza,Mr.Babar Daily Pakistan

Observer. 69) M.Asad Qureshi Chairman PQA. 70) Mr.Saud Mahmood PWI. 71) Dr.Brecht German Consul. 72) Mr.Farheen JCR-VIS.

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73) Ms.Riffat Sultana NIB-Bank. 74) Mr. Umair Shafi. 75) Mr.Bhagwan Das. 76) Mr.Altaf Hussain Dawn News. 77) Mr.S.A.Aslam Muslim World Economist. 78) Brig.Syed Jamshed Zaidi. 79) Mr. Raghib-ul-Khair K.P.T. 80) Mr.Moiz Ahmed. 81) Mr.Malik Bakhtiar Aziz. 82) Mr. Abdul Rahim Suriya. 83) Mr.Adnan Shah Institute of Chartered Accountants of

Pakistan. 84) Mr.Francis French Embassy Economic Department. 85) Mr.Ahsan Arshad Site Association. 86) Mr.Ahsan A.Siddiqui. 87) Mr.Rao Furqan. 88) Mr.Ashraf Radio Pakistan 89) Mr.Zia Qureshi Online International News. 90) Mr.Agha Nasir Abbas Ham Zaban. 91) Mr.Farooq Kasam Basathia TATA Textile Mills. 92) Mr.Shakeel Ahmed. 93) Mr.Mohammad PPRA,Sindh. 94) Dr.Tahir Abbas Naqvi The Times. 95) Mr.S.M.Mumtaz Daily Khabrain. 96) Mr.Shahnawaz Akhter Business Day. 97) Ms.Salma Qureshi Daily Pakistan Islamabad. 98) Mr.Sultan Mahmood. 99) Mr.Anus Habib. 100) Mr.Salman Lodhi channel. 101) Ms.Yasmin Sand L.T.U Karachi. 102) MrAli Anwar Chahdhry HRSL. 103) Mr.Ali Jamil TPI. 104) Mr.Abdul Rahim Suriya. 105) Mr.Shamim Kazmi Mare. 106) Mr.Sarfaraz Alam Global News. 107) Mr.Muhammad Asif News One TV. 108) Mr.G.Mustafa. 109) Mr.Salman Elahi P.I.D Karachi. 110) Ms.Almas Jilani .Royal TV. 111) Mr.Abdul Qadeer Menon Pakistan Tax Bar.

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112) Mr.Akeel Karim AKD. 113) Mr.M.Siraj. 114) Mr.Amin Shah Waqt News. 115) Mr.Ali Ahmed Jan Metro One. 116) Prof.Dr.Kausar Dawood Engineering. 117) Mr.Ali Syed N.E.D Engineering University. 118) Mr Khurram Naseem Gulistan Textiles. 119) Jahangir Siddiqui J.S Bank. 120) Shahna Kaukab BASF. 121) Mr.Arif Hissain Daily Jurat. 122) Mr.Mehtab Shah. 123) Mr Shirazi. 124) MrAbdul Rehman Arqan News. 125) Mr.Mehtab Shahhirazi News. 126) Mr.Imtiaz Ahmed . 127) Mr .Zubairi. 128) Mr. Anwar Siddiqui D.G.R.T.O. 129) Ms.Sayeeda Anjum Mushtaq . 130) Mr.Manzoor Hussain Customs and Excise. 131) Khalil Masood SKM Lanka Holdings. 132) Mr.Abdul Razaq Bughio PQS. 133) Dr.Malik Shahid AKUH. 134) Mr.Riaz Dunya TV. 135) Dr.Tariq 136) Ms.Misri Ladhani LTU-FBR 137) Mr.Sohrab.A.Gillani Expolanka Pakistan 138) M.A Mirza Association. 139) Mr.Khalid T.Z 140) Mr.Y.Lari T.Z. 141) Ms.Etrat.H.Rizvi NAMCO. 142) Dr.Salima R. Bukhari Pak Federation of Business

Professional Women. 143) Dr. Sabir Michael Szabist Karachi. 144) Mr.Smiullah Khan 145) Mr.Fateh Muhammad 146) Mr.Javed Pak-Customs 147) Mr.Aslam Pervez Swiss Consulate. 148) Advocate Syed Salim Ahmed Private Practitioner. 149) Ms.Shaista Gilani. 150) Mr.Ahmed Malik Nadeem Business Recorder.

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151) Mr.Syed Farooq Gilani. 152) Mr.Kaleem Personal Secretary to the Finance

Minister. 153) Mr.Zahid 154) Mr.Habib The News. 155) Mr.Z.Ibrahim Law Firm. 156) Justice.R.Khairi Trustee TI-Pakistan 157) Mr.Siraj Latif S.M Latif &Co. 158) Mr.Abdul Haye Sheikh. 159) Dr.Zulfiqar Malik Pakistan Customs. 160) Mr.Abid Sheikh Retired. 161) Mr.Naveed Ansari Siemens Pakistan Ltd. 162) Mr.Waqar Khan Nawa-e-Waqt Channel. 163) Mr Nasir Masroor Ahmed . 164) Mr.Amir Marwat Custom House Karachi. 165) Mr.M.Najeeb Haroon Principal Building. 166) Mr.Moin Aziz M.A Mirza &Associates. 167) Captain.A.Rashid Ship Agents. 168) Mr.Sohail ATV. 169) Mr.Neesar Ahmed CASB Bank. 170) Mr.Akber Shahid APTMA 171) Mr.Qamar Usman Karachi Chamber Of Commerce

and Industry. 172) Mr.Akber Only Intekhab. 173) Mr.Syed Wasif National Asset Management Co. 174) Mr.Rehan (Private). 175) Ms.Zareen Zahid Qureshi TIP 176) Mr.Umar Bin Qasim TIP 177) Mrs.Nargis Mirza TIP 178) Ms.Farha Mirza TIP 179) Mr.Faizan Usmani TIP. 180) Mr.Syed Kamran Ahmed. TIP. 181) Dr.N.I Khowaja TIP. 182) Mr. Mohd Imran Khan TIP. 183) Mr.Naseem Ahmed Siddiqui TIP. 184) Mr.Mansoor Iqbal TIP. 185) Ms.Arwa Sifuddin. TIP 186) Mr.Akhter Masih. TIP

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