Thursday, 25 July 2013

Monetization: How Valuable is Your Bureaucracy?

How Valuable is Your Bureaucracy?

For decades now the issue monetization of perks has been on the table. No action has been taken because the powerful secretaries who monopolize access to perks block the reform and because our austerity mindset keeps us from financing a reform that accelerates growth and employment. This reform is most necessary in housing because the current distribution is iniquitous and because its holding back economic development and employment. Let us see how!

Inequity

Recall government-owned accommodation such as houses, bungalows or apartments located in the posh areas of metropolitan centers. The location and addresses themselves are prestigious and symbolizing power. What is less well known is that not all civil servants get these houses. Of the 447155 civil servants,
  • 8% have the privilege of getting government-owned accommodation such as houses, bungalows or apartments located in the posh areas of metropolitan centers;
  • 20% are living in government hired accommodations,
  • the rest, 72% are getting house rent allowances which are equivalent to 45% of basic pay in Islamabad and some big cities while in smaller cities the allowance is 30%.

These disparities in entitlements have adversely affected performance in many ways.
  • Competition for the scarce resource happens through means other than performance on public service delivery. Performance on the job s no longer a focus.
  • Officers are distracted from their function and performance and focus in getting their privilege. Hence they are compromised.
  • The availability of good housing is also be a control device.
  • Coveted housing such as in the posh areas of Islamabad, Lahore and Karachi could have a rental value of Rs 300,000 whereas the the comparable allowance that is given to a comparable office who is not given a house would be in the range if 45,000. Taxes exacerbate the situation: The officer with the house pays no income tax on the Rs 300,000 compensation he gets while the latter does.

No transparency in expenditure on maintenance of housing

Government budget figures do a great job of hiding the cost of maintenance of these houses. It is well known that over the years, the powerful have been able to do more to their housing such as making additions, expensive renovations, even swimming pools and of course building boundary walls etc all at tax payer expense. When asked all divisions deny any knowledge of where this expenditure is. They are absolutely unable to quantify it.

Given the lack of information, I think we would not be wrong in putting forward the hypothesis that maintenance expenditures are likely to also be distributed in a manner that is inequitable, wasteful and sets up perverse incentives.

Monetize for growth.

The Framework of Economic Growth (FEG) that the National Economic Council accepted in 2011 put forward a major innovation in the development narrative of the country. Recognizing the importance of cities in development and the large excess demand in all areas of city activities --housing, schooling,public places, commercial, leisure--FEG suggested a shift in paradigm for our city development. FEG argued for a move from current car-friendly, suburban-sprawl approach to cities characterized by increased density and high-rise, greater availability of mixed use and less use on cars and more walkability. A move in thus direction would unleash a construction boom which will be employment friendly. Moreover, a high level of construction activity would have huge spinoffs which would create further growth and employment opportunities. In addition, as history has shown, the newer cities with increased commercial, community and public space can be expected to led to innovation and entrepreneurship.

An important factor holding back this vision that was embedded in the FEG is the large hold of the bureaucracy on urban development. Not only are all the zoning and building regulations in urban areas controlled by the bureaucracies -- army and civilian-- they also occupy most if the prime land for official housing and for giving free plots to themselves.

Be that as it may let us examine the possibilities emerging from monetization. .

Monetization in Islamabad

When I was at the Planning Commission in Islamabad, we estimated the gains from a monetization of housing reform only in Islamabad.

Cost: The reform would begin by adequately compensating all civil servants so that their welfare is not reduced. Previous pay commission recommendations have failed because they recommended giving them only the existing housing allowance which was a mere fraction of the rental value that the powerful were getting. It is no wonder the reform was blocked.

A better approach that is used in most countries was also considered. Link civil servant salaries to the market through periodic salary surveys of the relevant private sector. Of course a certain discount would apply and that would be decided by policy. This is a preferable approach as it gets rid if the many allowances that have crept into the system over the years.

Our estimates suggested that the cost of this reform would range from about Rs 30 billion annually (restricted to housing monetization for grades 17 through 22) to about Rs 165 billion (if all grades included. Changing the system would cost about Rs 140 billion annually since it would change the relativities within the system. Please note those figures are probably upper bounds since we are assuming that no reform such as changing the size of the civil service is made.. Of course a fuller reform would be able to control these costs with better outcomes.

Value if business as usual: The moment you mention this reform, many factions start salivating since the land we are taking about us the most prime in the country. For example the incumbents would like to grab it at book value pocketing a huge gain.

What we want is the land for complex, high rise, investment and employment friendly construction. For that the current use of housing in fact is a waste and needs to be urgently discontinued.
CDA estimates suggested that about 864 acres would be available after if all these government houses were vacated in Islamabad. Importantly thus land s available in large parcels of about 20 to. 50 acres. Given CDA planning, finding such parcels for commercial development is now almost impossible. Such fragmentation has destroyed construction possibilities and hence eroded value.

If we go the route of the usual CDA planning and sell this land in small housing parcels, the value is estimated to be Rs.233 billion.

FEG Build for growth approach: Assemble the land into large parcels for mixed use complex development. Zoning building laws would be changed to accommodate such construction.
Even with a generous allocation (about 50%) for common areas and amenities, about 423 of the 864 acres would be available for complex modern development. Note that Centaurus has been built on 5 acres with an investment if Rs 50 billion or USD.5 billion. Let us say we build the equivalent if 80 Centauruses on this land we are looking at an investment potential of USD 40 billion.

With generous height and use rules, it was estimated by the best experts available that this could result in an investment potential of Rs 6 to 10 trillion. This is equivalent to about USD 60 to 100 billion or 30 to 50 % of our GDP.

Jobs: Looked at from any perspective these are staggering numbers. If the construction of each it these building directly involves about 3000 workers and indirectly another 3000. We are talking of about .5 Million new jobs.

It is estimated that upto about 60 million square feet could be added in Islamabad through thus construction boom. Even if a third of it is devoted to flats we could add on well over 15000 dwellings to the housing stock. Let s say each apartment generates .5 job to service it, we are talking if over 75000 jobs.

If the remaining commercial development eventually yields 1 job for every 1000 square feet, about 40000 jobs will be generated.

The numbers are so exciting I do not know why we all do not come in the streets and ask for this long overdue reform. We are begging for aid which is given to us in dribs and drabs with hardly an impact on the economy. Here we have billions of dollars of investment at our feet.

Growth: Think about it! This development if done well without bureaucratic interference could take 10 years. Let us take a straight line approach, investment would increase by 3 to 5% of GDP annually. Based on our existing growth-investment relationship, this could increase growth by 1-2 % annually over and above other initiatives.

The value of bureaucracy: So the current comforts of the bureaucrats are costing us about 3-5% of GDP in forgone investment, about a million jobs, and 1-2% of growth annually. Think about it are they doing that valuable a job?

Finally this is in Islamabad alone. What if we could do it in the whole country? It would transform Pakistan. Now do u see why we argued for it vociferously in FEG,

Friday, 19 July 2013

Governance 1: Our Meeting Culture Must Change

Governance 1

Our Meeting Culture Must Change



Every day, newspapers show a picture of some meeting or the other. When you call a minister, the somber message "she is in a meeting" sounds very grave and responsible. And if it is the cabinet or the ECC, it sounds even more grave and serious. Indeed the fate of the country is decided in those meetings. What happens in those meetings? How seriously do our officials take those meetings? How well prepared are they? What is the quality of those discussions?

First, the picture in the papers. It is orchestrated in the ministry of information and us taken in the first few minutes contrived to show leaders hard at work. Why anybody would take it seriously, I do not know.

But that is not of interest. What is more interesting is the preparation for the meeting, who participates, why meetings are held, and what happens at it. Much governance improvement could happen if we can change our meeting culture.

Before we see what happens in Pakistan, let us quickly review meeting practices around the world.

Meetings around the world

  1. Participants must have a purpose: Steve jobs is famous for saying that meetings must be structured small and meaningful. He never allowed people to just be there who were not needed.
  2. Meeting preparation: Meeting experts suggest that meetings are result of a lot of hard investigation of an issue. They are called once background investigative work has been developed and absorbed by concerned people and a debate or decision is required. Consequently, meetings are prepared with agendas and documentation to support them. Moreover, this agenda and documentation is shared with people with enough notice and time to prepare for a meaningful discussion.
  3. More structure and investigation for higher level meetings: Higher level meetings of cabinets or cabinet subcommittees like the ECC in other countries are prepared through serious long term research and lengthy inter ministerial consultation. A policy for industrial development or investment or gas or electricity development happens only occasionally and must be built up through consultation between various ministries over months and backed by serious research and investigation to delineate clear choices. In most countries, this investigation also includes consultations with the nations intellectual capital. What should emerge on the high table is considered and well understood research and through it policy.
  4. Meetings are not work: meetings are required for sharing information, seeking common ground and agreeing on decisions for moving forward. But the real work is building up to meetings and informing individuals and organization with analysis of available evidence and global experience and knowledge. If not enough time is available for reading researching learning, attending seminars and conferences, learning does not happen. Meetings then get insular and incestuous and decision-making and strategy remains uninformed.
  5. Rules of engagement to prevent grandstanding: every meeting is structured by the chair to allow informed views to be aired and aggregated. That is why small meetings are preferred. Hierarchies and verbal pressure is resisted by rules such as equal allocation of time in higher forums and clear guidelines on language and addressing the chair etc. Even if there is no explicit voting, views are carefully tallied so that the chair sums up the sense of the meeting.
  6. Budgetary policy cannot be easily changed: neither the cabinet nor any forum is allowed to violate the budget which is a law that has been passed by parliament. Re appropriations must go back to parliament. Hence any proposals of a budgetary nature are not presented at such meetings.
  7. Ample time for strategic meetings at higher levels. Country cabinets and high level forums always keep strategic direction under review and build in long term thinking and policy review into their processes. While they have mechanisms for monitoring transactions these higher level bodies largely stay out of transactional work.

Meetings in Pakistan

Meeting, meeting all day: The first thing that strikes you in government in Pakistan is that there are too many meetings. Most people are running from meeting to meeting and then trying very hard to catch up,with their file work. No one has any time for learning through reading researching or attending conferences or seminars.

Oftentimes it seemed to me that meetings were called to fill in time. The whole day for everyone in government is spent in meetings. Even when they are not meeting, there are visitors asking for favors. So when do they read and absorb the material that is supposed to make policy decisions.

A permanent crisis: all governments in Pakistan are in a hurry to do things. There is a constant crisis mode. Even the donors talk in crisis terms: education emergency, macroeconomic crisis, energy crisis, impending water scarcity, millions below poverty line etc. not only is everyone in a hurry but all seem to claim a knowledge of all the solutions. So all we need is a meeting to make things happen--implement the favorite buzzword in Islamabad.

So Islamabad as well as its think tank, the donors, know all. Having absolved themselves of the need to investigate and research, they are absorbed in frequent and hasty meetings and the frenetic urge to implement.

Implementation without thought: All day through the year they try to implement in meetings. No one seems to the time to wonder why the various crises and emergencies are not going away despite the many hurried meetings and the deep knowledge of solutions that Islamabad and donors have. Could it this approach is flawed? Maybe less meetings, more thought, research and local thinking might be a solution.

The extreme hurry to develop without any real effort to learn and investigate pervades all levels of government. Several meetings are called at senior levels are called in a hurry supposedly in a crisis mode. Sometime the joke in the corridor is that this is to keep ministers and politicians busy. Occasionally there would be a meeting on the economic situation, once again at short notice with little preparation or inter ministerial consultation.

Too many participants: At these meeting some people are called even if they are not necessary but only because the picture in the paper would look good. One is sometimes even surprised by some itinerant presence such as a luminary or a friend of the powers that be even if they have little knowledge of the area. The meetings are way too large and unstructured and become grandstanding events with little substance.

Preparatory work: Often times no agenda is circulated for this meeting; nor is there any research or background material. The most that can be expected at most meetings is a hastily prepared power point presentation (often prepared by a junior official) that is read not by the author but the secretary. Since there is no investigative report and everything has been done in haste, opinion and loud voices and hierarchy speaks. Little is achieved. Often the meeting ends in confusion. Some window dressing is sold to the press courtesy of the PIB.

No strategic meetings: The mundane subjects that are chosen for such meetings is also quite worrisome: some road project or some sectoral issue where participants are looking for a subsidy or a brainstorming on some critical issue such as energy. Surprisingly the cabinet is approving concepts of free trade agreements which are passed with a murmur “routine matter” Why do routine matter come to the table?

Most meetings in government and even at the ECC and the Cabinet are transactional such as buying commodities such as sugar, fertilizer etc. or engaging in some foreign deal such as a big project or a long term commitment to buy LNG or some such necessity.

Again proponents of these transactions are in a tearing hurry to obtain an approval. For example, fertilizer purchases which happen every year are only brought to the table within days of an impending shortage without even the data on available stocks in the country, or the price of available fertilizer. No explanation is offered as to why such purchases cannot be smoothed out over the year through better planning. Interestingly there is no demand for such strategic thinking.

Interestingly there are occasional meetings of the economic situation, where the secretary finance makes a presentation on the economy which is short term in nature and almost totally focused on the budget. In the ECC there is a presentation on the data on inflation. There is never any meeting on economic growth and its medium term prospects.
No one is interested in how even reviewing why our growth rate has been declining over the long term or how we can get it up to the required 7 or 8 % or what is happening on employment?

The budget is no consideration: What is very surprising is that the transactions that are proposed in a hurry –purchases, subsidies, and fresh projects-- are all proposed and even approved without looking at their budgetary implications. How can you approve purchases of billions of rupees or an increase in subsidy to the farmer without worrying about what it might do to the budget in place.

Due Process, investigation and consultation: The crisis mentality and the hurry to deliver means that all processes are avoided. Ill-prepared work is hurriedly put before the cabinet and all meetings bypassing all rules of mandatory submission intervals, interdepartmental consultations and investigative requirements. Hastily-prepared summaries and a power point with the refrain of a crisis and a tearing hurry are the reasons given. And we commit billions of rupees, in the bargain setting up grounds for inquiries, litigation etc.

What is to be Done

Most important of all, we need to learn from the rest of the world. Much as we hate procedure and rules they are often required for forcing desired outcomes. But equally important, we must change the culture in our government from meetings to learning. So the culture of “meetings is work” should be changed to “reading and learning”. Similarly change should be made from meetings are a tamasha and a photo op to more pointed smaller meetings. Unnecessary people should not be invited merely to fill up a room.

But most of all this “perpetual crisis and hurry” approach must be changed. Rather than rush to act and always fall flat on your face, perhaps a slower more considered and deliberate approach might yield better results.

No meeting should take place unless the issue at hand has been thoroughly studied and the study has been circulated in advance and all concerned have had a chance to study it. Poor preparation must be penalized.

All financials must be fully disclosed. All proposals must be budget-neutral. Finance must testify to budget neutrality. Subsidy/commodity operations must be clearly shown with appropriate financing options. All ministries should be reminded that the budget making process must anticipate their purchase subsidy needs. They should not be allowed to present items that they had not not planned for then. Any new demand must be backed by an explanation of why there is a lapse from the budget commitment and where the emergency is. Then they must show where the funding must come from. MoF must come prepared to back funding and clearly show that the budget is not violated.

All items pertaining to an SRO should not be entertained

Why is it that policy, reform and restructuring work is not brought to the ECC and Cabinet? My view is transactions must be seriously discouraged. Violations of the budget that now happen all the time must be discouraged. Instead policy, reform and restructuring issues should be taken up.

All policy, reform and restructuring proposals must have give a month for inter ministerial review including a meeting to be chaired by the PC before it is even circulated. Policies are serious issue. The paper should be circulated at least a month before the meeting takes place to allow careful consideration and prevent multiplicity of policies.

All policy, reform and restructuring must be backed by research and clear indication of ownership by ministry. This will mean a well researched background paper prepared by experts in ministry. Consultants if used must be there for expert testimony.

All reform, restructuring and policy items should be clearly timeliness with implementation issues and modalities if any.

Procedure is very important: Meeting should not happen at the whims of anyone. Adequate notice is necessary for preparation time. Meetings like Cabinet and ECC should only happen at preassigned times and not randomly. They should also not happen too frequently.
There should be a quorum defined for the meeting to be held. If experts are required there must be a procedure and not that they should become a part of the meeting.

In each meeting, no more than 6 or 8 items should be taken up.

For the cabinet and ECC a rolling agenda should be maintained . All ministries should let the cabinet division know of items that they wish to place before the forums at least 3 months in advance assuring everyone of some forethought as well as some preparation. The rolling agenda must be made public. Emergency additions to the agenda must be discouraged and only entertained occasionally.
The procedure of meeting should be changed. In this electronic age, there is no reason for a long meeting. More and more written comments should be encouraged and decisions taken with minimum discussion. This will also allow better minute taking and disclosure.

There could even be a secure website for Cabinet and ECC exchange minimizing time of meeting.

The reason for a forum is to allow consensus building. In our case the Chair often decides independently of the meeting. This is not in keeping with modern democratic governance. Cabinet division must take note of views and ensure that the sense of the meeting is not overruled by the chairman.

Too often ministries keep retuning with proposals forcing an acceptance by attrition, There must be rules limiting a proposal from returning to the forum within say 6 months

Minutes are important for recordkeeping, transparency and even history. Meeting should be recorded and ministries encouraged to put more of their comments on paper and email. Minutes should be based on written comments of ministries with accurate reporting of oral discussion, if any. Minutes must be circulated and approved before next meeting.

Good governance requires that people know what is being done in these important meetings on their behalf. 3 to 6 months later the minutes must be released to the public so that the people are informed of positions taken and the sense of the meeting.

Tuesday, 16 July 2013

Austerity Pakistan 4: What is Pakistan's fiscal problem

Austerity Pakistan 4

What is Pakistan's fiscal problem

Pakistan's provinces where much of the welfare and infrastructure lies are all running balanced budget as required by the constitution-thank the almighty.

The federal government has obligations to smaller regions that it administers such as the FATA, GB, AJK but these are not more even 1% of GDP. Much maligned defense is about 3% of GDP which given the war on terror which has killed 50,000 people and destroyed many cities may not be too large. Running of the federal government is only about 1.5 % of GDP. Debt service is the largest amount about 4% of GDP. All in all the federal government does not appear to be a huge spendthrift locked up in huge administrative and defense expenditures that cannot be reversed. Where then is the problem?

The federal deficit borders on about 8 to 9% of GDP. Our Revenue is only about 9% of GDP. Adding up the above mentioned items, our expenditure commitments are only about 9.5% of GDP. Our deficit should then be about 1% of GDP at most rounding out errors.

Where does the rest come from?

PSDP

Well the government wants a public invest program the PSDP of about 3% of GDP. Can this be contained? Used more wisely? Absolutely.

For years this has been used as a slush fund by all political factions, the politicians, dictators, defense establishment, and the bureaucracy. There is a rush for development without purpose. Indeed much if it is brick and mortar with a low rate of return and oftentimes developed for non-economic ends.

PSDP has also created assets which if used well would allow could return funds to it so that development could be self-sustaining. The Malaysian Khazana or the Singapore Tamasek model cones to mind. But in the current governance structure such institutional innovation would be anathema.

But in the current model PSDP spending provides only a small short term stimulus (.07% for every 1% increase in PSDP see Pasha et al at PC) to the economy. In the long run studies such as Ghani and Muslehuddin have shown that the PSDP has no positive impact on growth. If PSDP operation is cleaned up it could easily result in an annual gain of about 1% per annum in economic growth.

PSEs

But the other major drain from the budget is the PSEs especially the energy sector. Over the years, the PSEs have been enmeshed in the administrative bureaucracy which has often used these for their own slush funds and repositories of perks. The DMG gets positions in boards and often even as executive heads of the PSEs. The rules if business make the secretary the principal accounting officer (PAO) of the PSE. This status allows the PAO to raid the PSE for vehicles and real estate.

This parasitic or symbiotic relationship between the administrative bureaucracy has for years prevented a clear financial position of PSEs to emerge. Often timely audited balance sheets are not available. Management is frequently not in control of staffing, investment, maintenance, pricing and other strategic decisions. The result is that we really do not have separate organizations. Nor are we able to anticipate financial flows. Debts build up as a byproduct of our institutional arrangements.

For the last 5 years we have continuously been surprised by the frequent buildup of losses in the PSEs despite sporadic pay-downs. And it should be noted that since many PSEs are in control of essential services like energy, railways and airlines, they can force payments as services are shut down. Meanwhile an economy of shortages develops. Growth and productivity decline and hence employment opportunities are curtailed.

Without reform we can expect that the PSEs are likely to lose 3 to 4% of GDP growth annually.

Commodities

For some reason despite devolution that has made agriculture being a provincial subject, the federal government for its own political needs wishes to intervene in agriculture markets. It subsidizes fertilizer and chooses to set the procurement price with a commitment to buy for wheat. While the fiscal cost of these commodity operations is only about .5% of GDP, they do involve large and expensive government guarantees (almost 2% of GDP worth of bank credit is used. In addition they distort the agricultural market. Cleaning out this operation ie, rescinding government involvement is expected to increase GDP growth by about .5% annually.

The net result

Summing up these figures we can see that our fiscal deficit of about 7-8% comes from PSE losses, PSDP and commodity operations.

Careful and well articulated reform in these areas could not only make the budget manageable but have the additional payoff of increase in annual economic growth of about 5 to 6%. The quick fix of arbitrary taxes and chasing false revenue numbers is a bad strategy that is exacerbating the ailment of poor governance and low growth not fixing it.

We would be remiss if we did not add the cost of our maladministration. The loss of capacity in government as well as the weakening of governance procedures in pursuit of austerity has contributed to the adoption of hurried and flawed policies that are costing the government much. For example the guarantees to various sectors of industry (IPPs, cars, fertilizers etc) slow down investment and frequently operate like call options on government.

Arbitrary expenditure cuts in interests of austerity have taught the rulers to disrespect the budget. Hence throughout the year the cabinet and the ECC are entertain off budget expenditure items in contravention of rules and fiscal policy. For example, when sugar prices were going up in 2009, government imported sugar and when there was an abundance of sugar in 2012, government bought sugar from sugar mills to save them. Both acts were off budget and the result of poor procedures and lack of process and human capital in the finance ministry.

Understanding the budget in this fashion shows clearly hat there are no quick fixes. The deficit is structural and really a product of the underlying institutions of governance. A durable fiscal adjustment will require fixing the governance institutions--detailed civil service reform, development of expenditure management, change in the rules of business, innovation in PSDP management, realignment of the role of government.

All Roads Lead to Rome: Reform Leads to Growth and Fiscal Sustainability

The good news is that if we do this right not only do we address the fiscal situation, we also regenerate growth and productivity.

Changing the model from austerity to growth is win-win.

As shown in the earlier austerity articles, tax revenues can be increase through deep reform such as elimination if SROs, perks/plot culture, and better use of government assets. It is the same reforms that willi help the expenditure side. The same reform increases growth.

This in essence was the Planning Commission Framework of Economic Growth which was passed by the National Economic Council. Time to take it seriously.