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-governance

as a tool for more openness and in order to

make processes more effi cient.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 ‘minimises 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 transparent

manner’.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 Reconciliation

Ordinance (NRO) on 5 October 2007, fi ftysix

days after the ratifi cation of the UN

Convention against Corruption.5 In many

ways this was a setback for anti-corruption

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October 1999 were withdrawn and terminated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 the recommendations of the

Special Parliamentary Committee on Ethics

or the Special Committee of the Provincial

Assembly on Ethics.6

Public ills, private woes: the survival

of the private sector during political

instability

Corruption 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) over

Rs150 billion.8 Furthermore, the World Bank’s

Control of Corruption Indicator in 2007 ranks

Pakistan a mere 21.3 out of 100.9

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 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

fl ourish. Despite Musharraf’s claim to be committed

to fi ghting 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 2008

general 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.12

The inauguration of the new president, Asif

Ali Zardari, on 9 September 2008 ushers in a

new era, 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 ation, 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 trade

defi cit inherited from the previous government.

Banking fi nes 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, fertilisers

and pharmaceuticals, to name a few. Although

cartels distort market prices, they also create

other anomalies. Existing players in an industry

may fi rmly 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 Ordinance

2007, in order to ‘provide for a legal framework

to create a business environment based on

healthy competition towards improving economic

effi ciency, developing competitiveness

and protecting consumers from anti- competitive

practices’.15

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’.16

In one of its fi rst initiatives, the Competition

Commission challenged the Pakistan Banks

Association (PBA) on its decision to ‘collectively

decide rates of profi t and other terms and conditions

regarding deposit accounts’.17 The PBA is

a membership association to which only banks

in Pakistan can be affi liated, and it advertised

its decision openly in a daily newspaper on 5

November 2007. The terms of the agreement

included a number of its member banks imposing

‘a 4 percent profi t on Rs20,000 deposits and

a Rs50 charge on less than a Rs5,000 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 ESAs

without the prior instruction or agreement of

the account-holders.

The Competition Commission considered this

move by the PBA to be in violation of section

4 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 Rs5,000 having to pay

Rs50 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 justifi cation of their behaviour to the

commission by 10 January 2008.19

Both the PBA and the banks issued responses on

9 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 that

it could not be considered to be stifl ing competition

as 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 per

cent.21

The fi nal 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 account-holders

of the benefi 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

fi nes. The PBA was fi ned Rs30 million, and the

seven banks involved were fi ned Rs25 million

each.23

The penalised 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.24

The 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.

Privatisation: Pakistan Steel Mills

Corruption in privatisation in Pakistan is

endemic: manipulation of the process can be found at all stages, from the evaluation of profi ts

and assets of a company to the provision of kickbacks

on completion of a settlement.

One of the most famous cases relating to privatisation

involves the attempted privatisation

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 privatise it, and, following

the rules, secured approval from the Council of

Common Interests.27

In 1998 the privatisation of Pakistan Steel Mills

was abandoned, and to make it profi table the

labour force was reduced from 20,000 to 15,000.

As the steel mill had been designed, constructed

and fi tted 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 tonnes. By December 2004, less

than two years later, the privatisation of the

plant was being discussed again, and by 10

February 2005 the decision to privatise 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 privatisation, and Chief Justice Chaudhry

prevented the sale of the state monopoly to the private investors.29 The Supreme Court concluded

that approving the award of the contract

refl ected 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 privatisation

of the mills was ‘vitiated by acts of omission’

and violated the mandatory provisions of laws

and rules.31 The valuation of the project and the

fi nal 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

today, as it is considered one of the causes of the

dismissal of Chief Justice Chaudhry in March

2007, 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 fi led

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 defi ned in section 9 of

the National Accountability Bureau Ordinance

1999, 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 privatisation 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)

TI Pakistan: www.transparency.org.pk.