Daily Times

The prices of imported coal, according to media reports, have gone up sharply following the Supreme Court orders banning the coal unloading at six berths of Karachi Port Trust. Following the citizens’ complaints about environmental pollution, the court ordered to use Pakistan International Bulk Terminal (PIBT) for unloading imported coal. The PIBT is a purpose-built dirty cargo terminal at Port Qasim, some 50 kilometre away from Karachi. The major component behind this price hike is sudden rise in the handling charges by the PIBT. Although the court’s June 20 judgment, as per media reports, had directed the PIBT to charge shipments “at the same rate which is being presently charged”. However, PIBT is reportedly charging Rs 850, alongside other miscellaneous charges, per tonne instead of actual rate of Rs 600 per tonne. The PIBT reportedly argues that it is charging an extra fee at 15 percent under the head ‘fuel adjustment charges’. It is feared that the PIBT handling charges would further go up resulting in a corresponding price hike of imported coal. The result will be a proportional rise in everyday commodities directly or indirectly.

Apparently, the issue is administrative in nature but gets complicated when placed in Pakistan’s wider framework of business regulation. In terms of economics, call it either ‘business uncertainty’ or ‘business monopoly of PIBT’; the common man will eventually have to pay the price. It is because of the large scale usage of imported coal in our industry that includes, but not limited to, cement factories, power plants, textile sector and other export-oriented industries. Furthermore, it is the business men who will define the ease of doing business in Pakistan. Their feedback will be crucial for the novice investors in deciding their future investment ventures in Pakistan.

It may be underlined that ‘trading across borders’ and, ‘enforcing contracts’ is part of eleven indicators of the World Bank’s Doing Business report 2018. It is not to argue that these indicators are exhaustive in nature and Pakistan must follow them. The purpose is to highlight the argument, raised by the 2018 Doing Business report, that 60 economies have made reform committees that use ‘doing business indicators’. Different governments of the world have shared more than 3180 regulatory reforms of which 920 reforms were inspired by ‘doing business’ reports. Despite this trend, Pakistan should also focus on identifying its own ‘doing business’ indicators as per the country’s peculiar context-specific business dynamics.

A sudden rise in the price of imported coal is one such case study showing how the factors of uncertainty and monopoly in business can adversely affect the commodity prices and the entire business supply chain. Such supply chains usually contain several business contracts requiring their legal enforcement. This suggests that an easier mechanism to enforce contracts actually facilitates ‘doing business’ and this is what many novice investors want. A detailed analysis of this case, and other similar anomalous cases, can help improve many business indicators such as ‘trading across borders’ and ‘enforcing contracts’.

It is pivotal to understand the relationship among business, economics and law. It can be linked with contract theory, for which Oliver Hart and Bengt Holmström were awarded the 2016 Noble Prize in economics

In this regard, it is pivotal to understand the unbreakable relationship among business, economics and law. This trio is indeed an intertwined amalgam that can make or break countries’ ‘doing business’ ranking worldwide. The inter relationship among these three areas can be linked with contract theory for which Oliver Hart and Bengt Holmström were awarded the 2016 Noble Prize in economics. Contract theory, as the name infers, is not just confined to the enforcement of legal contracts, it also explains the role of formal and informal agreements, business proposals and contracts among people with varying and conflicting business interests. It also focuses how interaction among different business stakeholders can result in mutually beneficial actions. It is indeed a theoretical framework that can guide kick starting business reforms with a view to restructuring mechanisms and procedures for robust and mutually beneficial business relationship among different stakeholders in the entire supply chain. This includes employers, employees, different companies, chief executive officers, and shareholders. The bottom line is that the contract theory is all about giving due motivation and incentives to effectively work together. It may help align the strategic direction of our ‘doing business’ reforms. Therefore, the purpose of this commentary is not to suggest specific reforms but to devise a strategically conceived framework that could be followed for revamping business regulation.

In Pakistan’s context, there is a need to introduce reforms in different areas of ‘doing business’. In my view, such areas should be determined after studying anomalous business case studies and their associated problems such as the case of imported coal. This suggests that many of such areas or blocks will be different for different countries based on their specific business environments. However, some universal areas are law, finance, management and public policy. Once these intervention blocks are formed, they can improve the associated indicators of doing business in a systematic manner.

Pakistan clearly has a strategic business and economic interest in improving it’s ‘doing business’ ranking which is declining, at least, since 2006. Following the contract theory, three initial areas or interventions can be the hallmark for effectively kick starting ‘doing business’ reforms in Pakistan: (1) economic interventions, (2) legal interventions, and (3) business interventions. A special business reforms committee may be constituted with three specialized sub-committees dealing exclusively with economic, legal and business interventions. The task of the sub-committees should be to frame themes based on Pakistan’s practical business problems after consulting stakeholders. Any recommendation to blindly import other countries’ business models should be discouraged because other business models have evolved over time in their specific business environments that may not be suitable for Pakistan.

Economic interventions, led by senior economists, may suggest reforms for ‘doing business’ indicators such as ‘getting credit’, ‘paying taxes’, ‘macroeconomic stability’, ‘development of financial system’, ‘market size’, and, ‘trading across borders’. Legal interventions, guided by senior judges and lawyers, may help remove the bottlenecks for revamping relevant indicators such as ‘enforcing contracts’, ‘resolving insolvency’, ‘protecting minority investors’, ‘registering property’, ‘dealing with construction permits’, ‘incidence of bribery and corruption’, and ‘lack of security’. The business interventions, led by senior members/officials of chambers of commerce and Board of Investment, may recommend reforms towards such indicators as ‘starting a business’, ‘getting electricity’, ‘labour market regulation’, and ‘quality of labour force’. The purpose of this strategic framework is to systematically remove administrative and legal barriers in a coherent manner with a view to improving business regulation and strengthening entrepreneurship.

Based on the above three broad categories of interventions, workshops and seminars may be conducted with a view to compiling the feedback of economists, planners, judges, lawyers, traders, industrialists and businessmen. This practice will identify more ‘doing business’ themes and their corresponding sub-themes in line with Pakistan’s local business dynamics. Once they are identified, they can accordingly be aligned under one of the three intervention categories. The practice will also define Pakistan’s short term and long term strategic business interests. Legally, the business framework so devised should ideally override all other laws, if a dispute arises such as rise in the imported coal price.

In line with the agenda of the Pakistan Tehrik-e-Insaaf government, improvements in the ‘doing business’ indicators can help create new jobs and alleviate poverty. These factors largely depend on the level of business uncertainty, market proximities, business monopoly, effective business supply chain, and the availability of infrastructure, employment status and the enforcement of business contracts. These factors can strengthen the ability of private sector to create jobs, lift people out of poverty and create more opportunities for a prosperous economy.

The case study of imported coal price hike indicates the vulnerability of ease with which businesses are done in Pakistan. The purpose of this piece is not to merely highlight the imported coal price hike but to draw attention to the consequences of uncertain business environment and their impacts for investors and the country’s business ranking at international level. Such fragile and asymmetric variables are directly linked with the level of ‘ease of doing business’ requiring immediate economic, legal and business interventions for ensuring better business regulation in Pakistan.

The writer is Additional Commissioner, Federal Board of Revenue, Government of Pakistan, holding PhD in Economic Planning from Massey University, New Zealand. The views expressed are his own. He can be reached at babarchohan21@gmail.com.

Published in Daily Times, October 8th 2018.