The visible hand of state

By Ali Salman|

Published in The News on Sunday, April 17th,  2016|

The Economic Coordination Committee of the Cabinet (ECC) was formed as an emergency war time committee in 1965 following suspension of economic and military assistance. Even though the war finished in 17 days, the committee has existed well over 40 years now.

This paper attempts to look at the ECC mechanism as the linchpin of economic governance in the country. In the absence of any literature, the paper is based on the analysis of publicly available minutes of the ECC meeting, and background interviews of some very senior former government officials, who have worked closely with the ECC. The analysis is based on 40 decisions taken by the ECC over 2013-15 time period.

Over the years, both the composition and mandate of the ECC changed extensively. Except for former president Ayub Khan and former prime ministers Zulfikar Ali Bhutto and Shaukat Aziz, the ECC is generally chaired by the finance minister/advisor to the prime minister for finance. The ECC comprises mainly economic ministers, who are directly nominated by the prime minister. In its current form, it was constituted in July 2013, consisting of 11 ministers comprising finance, commerce, communication, industries & production, information, law & justice, food security, petroleum and natural resources, planning & development and reforms, railways, and water & power. Prime minister authorises the finance minister to chair the ECC meetings, a prerogative normally held by the prime minister. Special invitees include: Governor State Bank of Pakistan, Deputy Chairman Planning Commission, Chairman Securities & Exchange Commission of Pakistan, Chairman Board of Investment, and secretaries of all ministries represented in the ECC.

All decisions of the ECC are required to be ratified by the federal Cabinet under the rules of business. However, the present finance minister has sought exemption from the prime minister and now the ECC decisions, once taken, become final.

Mandate

The mandate of the ECC, as notified by the Cabinet Division, include: (i) consideration of all urgent economic matter and coordination of economic policies initiated by various divisions of government; (ii) to identify and propose measures for the gradual attainment of a welfare state; (iii) to keep a vigilance on the monetary and credit situation and make proposals for the regulation of credit in order to maximise production and exports and to prevent inflation; (iv) to determine the future pattern of growth of major industries; (v) to review from time to time the country’s import policy and its effect on production and investment; (vi) to evaluate export performance from time to time in relation to specific policies and measures for the promotion of exports; (vii) to watch the current price situation with a view to ensuring stability of prices of goods used by the common man; (viii) implementation of any other task assigned by the Cabinet from time to time; (ix) cases of agreement and licensing for oil prospecting and exploration; (x) monthly/annual reports on autonomous bodies; (xi) cases of non-repatriable foreign investment; (xii) private sector schemes based on more than 50 per cent imported raw material; (xiii) cases involving fiscal anomalies; and (xiv) review of foreign aid utilisation

The ECC is empowered to consider and take decisions on all urgent economic matters in coordination with economic policies initiated by various divisions of the federal government. Its official fifteen points mandate is ambitious and over-arching, to say the least.

Constitutionally, the National Economic Council (NEC) is mandated to review the overall economic condition of the country and “shall, for advising the federal government and the provincial governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall be guided by the principles of policy set out in Chapter 2 of Part II”.

Overtime, the NEC has become a ceremonial platform instead of discharging the assigned mandate and its executive authority has been assumed by the ECC in terms of policy-making on various economic issues and Executive Committee of the NEC (ECNEC) approves development projects on behalf of the NEC. The Constitution requires the NEC to meet twice in a financial year post 18th Amendment. However, it barely meets once a year and there is hardly any constructive or serious debate on financial, commercial, social and economic policies. Incidentally, the provincial governments are not represented on the ECC and quite often decisions affecting the whole economy and entire country are taken without consultation with the provinces. Likewise, quite often it assumes the authority of the legislature by amending the Tax regime through Statutory Regulatory Order (SRO) without ever referring such amendments for ratification by the Parliament.

The process

The Rules of Business 1973 requires that a subject matter being submitted to the ECC for consideration must be shared with the concerned ministries and their views must be incorporated in the summary before it is tabled before the ECC. Secondly, the rules require that there should be a clear seven-day notice. However, many a times these obligatory provisions of the rules are not observed. Frequently, summaries are tabled by ministries during the meeting of the ECC.

For example, the proposal of bailout package for the state-owned Pakistan International Airlines is brought forward by the Aviation Division, with endorsement of the Privatisation Commission, if a State Owned Enterprise (SOE) is also on the cabinet approved list of privatisation.

This paper has only included those decisions that have a clear price tag officially available and has not quantified the dynamic impact of several policies, notifications and exemptions which are approved by the ECC. The following table 1 is the summary of these decisions.

Table 1: ECC Decisions (July 2013 to August 2015)

The decisions taken by the ECC can be categorised into following:

Exemptions: those decisions which allow special treatment to a sector or a firm for any reasons;

Contracts: procurement of goods and services on behalf of the government;

Sovereign Guarantees: explicit guarantee provided by the federal government usually against a SOE to meet some emergency need;

SOE Loans & Grants/Bailouts: extended directly to SOEs through government transfers;

Subsidy & Rebates: Subsidy is offered to certain SOEs to cover difference between cost and price and rebate is like an incentive conditioned with sale/exports proceeds usually offered to private firms.

Ali Salman table

Regulatory Duty/Tariffs: imposed by the ECC on selected goods and services over and above the approved budget;

Permissions for Capital Movement and Acquisition: meant for the private sector entities which are obliged to get clearance of the ECC before movement of their capital abroad.

This classification is not exhaustive and does not imply any outright illegality. However, the purpose of classification is to show the power that this committee of the federal cabinet has acquired over the years without recourse to parliamentary oversight or normal bureaucratic filtration. The decision-making process itself lacks transparency and does not lend itself to accountability because of the nature of shared decision-making.

Command Summaries

According to a retired government official, who participated in and facilitated many of the ECC meetings, the decisions taken by the ECC are not well-informed. The mode of policy proposals forwarded by various ministries on this platform is a “summary”. The former official actually considers them “command summaries”, where hardly any research is done.

It can be seen from Table 1 that the accumulated monetary impact of the ECC decisions during these two years is a colossal sum of Rs750 billion. Just for comparison, last year the entire federal outlay for the development projects was around Rs700 billion. When the dynamic impact of its decisions such as exemptions and policies is considered, the real monetary impact may be several times.

The ECC, in its goodwill, might be considered as a safeguard mechanism for ‘market failure’, e.g. the provision of wheat to temporarily displaced people, and in some cases, to bridge demand and supply gaps, e.g. in the import of urea fertilizers, or to control market movements, such as ban on export of rice, or a regulatory duty on import of potato. Thus, it is important to analyse the types of decisions it takes and its monetary impact, something that needs extensive research.

In the absence of a trade and industrial policy, the ECC decisions effectively play the role of trade and industrial policy by the imposition of regulatory duties on various commodities. Unlike an elaborate trade and industrial policy, the ECC decisions are mostly ad hoc in nature, often initiated on special requests or instructions.

The decisions taken by the ECC create distortions in the market. For instance, the ECC can approve ‘inland freight subsidy on sugar’ despite the fact that it is private business transaction or ‘regulatory duty on import of potato’. By taking such decisions, the ECC intervenes in the free market process of price determination. By restricting the imports of one commodity and facilitating the export of another commodity, the ECC gives this signal that local commodities may get compensation for their lack of competitiveness. It gives them artificial oxygen.

The ECC is also used as a body to get summary approval for political packages such asKissan (farmers) Package. In Kissan Package, announced in late 2015, the government announced benefits of Rs450 billion for farmers from different sources including direct cash payment to subsidy on inputs. However, it was not clear that how the government will finance this package. This was not approved in the budget, and thus the ECC used its muscle to force the government-owned National Bank of Pakistan to finance part of the package.

The ministries are led by secretaries and as such, secretaries of all member ministries do attend the ECC meetings. However, none of them is a legal member of the ECC, and participate as observers or as special invitees. This limits their interest in discussions and deliberations and decisions are often taken after a monologue. In general, dissent mechanisms have been muted. In one meeting held on September 11, 2014, for example, the chair (finance minister) “advised all the representatives of ministries to discuss the issues on which they have opposing views first among themselves and then come to the ECC only for the final endorsement of a well-prepared proposal.”

The ECC decisions also have far reaching impact on the provincial budgets, however there is no representation from the provincial governments.

The ECC as Exemptions Coordination Committee

The ECC has come to be known as Exemptions Committee of the Cabinet. One very obvious example is a decision of the ECC in the case of China-Pakistan Economic Corridor (CPEC), wherein it allowed creation of a revolving fund for Chinese Independent Power Producers to pay for the 22 per cent of the recoverable power dues which is typically equal to the circular debt. In its meeting held on March 19, 2015, the “ECC approved Supplemental Agreement with the provision that the revolving account (equal to 22 per cent of monthly invoicing) for the CPEC Power Projects be opened and maintained by the power purchaser for which the Ministry of Finance would provide the guarantee to fund such revolving account in case the power purchaser failed to place and/or maintain the required funds in such account.”

Here is another example of an exemption, as noted in the meeting of the ECC on April 12, 2015. The ECC approved the exemption of 5 per cent sales tax on wheat bran. The Chairman Federal Board of Revenue (FBR) argued that the main product of the flour industry was exempt from sales tax and imposing a tax on its byproduct, bran was creating an anomaly which had to be removed. Accordingly, the ECC allowed the exemption of sales tax on bran.

Pakistani laws allow 100 per cent repatriation of dividends and profits to all foreign investors. However, Pakistani firms are not allowed to repatriate their capital outside. Any Pakistani firm which would like to repatriate its capital for an equity injection or a takeover outside Pakistan is obliged to seek the permission of the ECC. In the period under study, the ECC considered and allowed four such applications amounting to US$ 366 million. These decisions include: permission to Fatima Fertilizer for equity stake in a US firm by investing $300 million; permission to Attock Cement to invest $24 million in Iraq; permission to RAK Ghani Glass Limited to invest $2.3 million in UAE; and permission to Lucky Cement to remit $40 million.

State Owned Enterprises

As if the control of the government on trade of many commodities through Trading Corporation of Pakistan (TCP) is not enough, the ECC also controls the TCP and gives policy guidance. For example, the ECC gave approval for the Sale of Lint Cotton procured by the TCP during 2014-15 in its meeting of July 8, 2015. Accordingly it decided: “Trading Corporation of Pakistan will sell out the cotton stocks through national/international competitive bidding process…and will fix a reserve price and bids below the reserve price will not be accepted.”

The state-owned entities, whether working as corporations or listed companies, get direct direction from the ECC, thus bypassing any chain of command. On a summary moved by the Ministry of Petroleum and Natural Resources for the Import of Petroleum Products on C&F basis, the ECC decided, on June 6, 2015, that the Pakistan State Oil is allowed to import Premier Motor Gasoline and Low Sulphur Furnace Oil on C&F basis while import of High Sulphur Furnace Oil would be through Pakistan National Shipping Corporation, another SOE.

Loss-making state-owned entities routinely approach the ECC for bailouts, subsidy and guarantees. Their requests are often approved by parking contingent liabilities in the federal budget. There is no way the government can actually anticipate these urgent financial needs of SOEs at the time of budgetary approval that ultimately leads to ballooning of the non-development outlays and hence budgetary deficit.

The government also uses the ECC as an instrument to intervene in the open market processes. For example, in its meeting held on May 21, 2015, the ECC considered and approved the proposal moved by the Ministry of Industries and Production for the import of additional 150,000 tons of Urea fertilizer for Kharif season. Additional import has been allowed with a view to bridge the demand and supply gap and build up sufficient buffer stock. Through this intervention, the government actually suppresses market signals of shortage or surplus which actually distorts the pricing system.

Examples of intervention in the market through the ECC abound and sometimes one wonders what will happen in absence of the ECC? In its decision taken on April 9, 2015, the ECC referred the matter regarding re-allocation of RLNG to Fauji Kabirwala Power Plant by equivalent reduction from KAPCO, allocation to Rousch Power by allocation from Nandipur power plant along with other issues concerning treatment of transportation charges as non-operating income for both the gas companies, and formation of a committee comprising finance secretary, secretary P&NR, secretary Water and Power and Member Gas, OGRA for deliberations. In case of disagreement, the committee was asked to revert to the ECC. Under a well-functioning market, not just the ECC, but for that matter, a government should be least bothered about these allocations.

Regulatory Function

The regulatory bodies largely function as extended departments of various ministries. At times, the ECC replaces even these regulators. A case in point is its role in tariff rationalisation. In its meeting of May 21, 2015, the ECC held detailed deliberations on a proposal submitted by the Ministry of Water and Power on Tariff and subsidy rationalisation and approved that the current notified average consumer tariff rate along with its components and surcharges, will be maintained so the total average national tariff will not increase. The government will continue to subsidise the domestic consumers (up to 300 units) and agriculture consumers, and continue to pass on the full cost of service as determined by NEPRA.

Regulatory Duty and Taxes

Usually duties and taxes are domain of Parliament which is usually exercised in the annual budgets. However, through the ECC, the government not only bypasses the Parliament, but also introduces several mini budgets. For example, in its meeting held on April 30, 2015, the ECC on a proposal from the FBR allowed levy of 2 per cent regulatory duty on petroleum crude oil, motor spirit oil and furnace oil. Approval was also accorded for imposition of 2.5 per cent regulatory duty on high speed diesel. The step was aimed to recoup some of the revenue losses due to persistent fall in petroleum products in the current financial year. It was clearly non-democratic.

In a mini-budget unveiled to fetch Rs40 billion taxes under the International Monetary Fund (IMF)’s conditions, the government on November 30, 2015, imposed one per cent additional customs duty by raising the maximum slab from 20 to 21 per cent, enhanced and imposed regulatory duty on 350 imported items, hiked rates for cigarettes, and raised fixed duty on used and old imported cars. Commenting on this decision, the finance minister used these words: “The ECC has approved additional revenue measures by raising taxes on the rich, and discouraging imports of luxury items. We have raised tax rates on the basis of one principle with the consent of Prime Minister Nawaz Sharif that it should not negatively impact the common man of this country.”

Clearly, no other body but only Parliament can take recourse to new duties and taxation, or new rates of duties and taxes. The ECC decision is an open and shut case of violation of the constitution.

Reforms

At times, the ECC may also expedite a decision leading to economic freedom and policy reform. Moving a proposal regarding Pakistan Power Sector Reform, the Secretary m/o W&P informed the meeting, held on April 30, 2015, that pursuant to the 1992 Power Sector Reform Plan approved by Council of Common Interest the function of transmission of electric power and transmission facilities is vested in National Transmission and Dispatch Company (NTDC). The System Operations was being conducted by NTDC through its various divisions. The reform plan also envisioned the creation of a competitive wholesale power market that would benefit the power sector and Pakistan’s economy in general via newly introduced profit incentives, an increase in managerial autonomy and an improvement in managerial accountability.

Can we do without ECC?

The ECC, over the years, has become an integral part of economic governance — rather a linchpin of economic decisions in Pakistan. It is observed that Prime Minister Nawaz Sharif is not very particular on calling cabinet meetings. He has also not complied with the constitutional requirement of holding the bi-annual meetings of Council of Common Interest — a top level inter-provincial committee comprising the chief ministers. Similarly, the forum of National Economic Council is very inactive. In the absence of these forums, the ECC has become a de facto cabinet. A logical corollary of this anomaly is that the chair of the ECC — the finance minister — has become de facto prime minister. It may be just symbolic but the website of the Cabinet Division shows a few photos of the meetings of the cabinet, chaired by the finance minister. The prime minister, known for leading bold and far-reaching economic reforms in the past, is missing in action.

In an environment of low budget sanctity, the ECC becomes an instrument in the hands of the government to further deteriorate the budget sanctity. It has become the business arm of the central government. On the other hand, given the lengthy and archaic rules of business that define our governance, the presence of the ECC is also perceived as the vehicle where quick decision making after quick deliberations becomes possible. This saves time and can actually help the government to come over bureaucratic hurdles.

However, the bigger question that needs to be asked is not on the existence of the ECC as such. Rather, it should be about the rules of business that has strangulated economic decision making by over-burdening a government with choices it should not have at the first place. It is not the business of the government to do business. If this oft-repeated sentence of Prime Minister Nawaz Sharif is adopted as a guiding principle, the government will be relieved of thousands of decisions that it has unnecessarily taken upon itself to make. This will help us in creating a smart, lean and agile central government that will be taking fewer, but well-informed, far more effective and more transparent decisions.

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