An interview with Makhdoom Hashim Jawan Bakht- Finance Minister, Punjab

BR Research recently sat down with Punjab’s Finance Minister, Makhdoom Hashim Jawan Bakht to discuss his government’s economic strategy for the province. The discussion focuses on the pressing need to address growing pension liabilities and commodity operations, improving the state of small and medium enterprises in the province, tax collection reforms as well the future course of development in Punjab.

Below are edited excerpts of the conversation.

BR Research: Let’s start off with the recently announced budget. Please walk us through the thought process behind it.

Hashim Jawan Bakht: Our aim is to have a more inclusive approach towards policy-making. One approach could have been to do it with the conventional way which is to throw up numbers on both sides and just aim for short-term glory. But that is not what we went for. We wanted the people to see and understand the true picture themselves. Keeping in view the macroeconomic situation of the country we had some tough decisions to make but thankfully we feel we have re-prioritised in line with our party’s manifesto. The agenda is to focus on the social sector and human development index. Our development budget may be smaller but our aim is to make it an outcome-oriented model rather than an input model. We are going to focus on measures that shall yield results that we want.

From a finance perspective, an elephant in the room that needs to be addressed is the growing pension liability. It’s growing at a very inorganic rate so much so that the pension liability now equals collection of taxes.

The other pressing issue is commodity operations. In 2008 it was nothing and today it stands at Rs447 billion. Out of this amount 70 percent is interest payments to banks and 30 percent is genuine transfers to farmers. We did not focus on agriculture especially in terms of crop rotation. On the other hand, we have a $2 billion edible oil import bill. Both of them combined, pension payments and commodity operations are taking up a lot of our fiscal space. A couple of years ago the pension liability was at Rs3.8 trillion but right now based on actuarial valuation it has reached Rs5.5 trillion.

BRR: What kind of economic policies do you have in mind for development?

HJB: Development needs a complete rethink. The economic growth strategy for next five years has been on our radar and is coming out soon. There are two things which have helped us make this strategy more meaningful. The first has been the new census data which provides the population dynamics and allows us to plan accordingly.

The second is the Multiple Indicator Cluster Survey (MICS) which is also coming out soon. We had the 2014 data but very soon we’ll have the 2017-18 data as well. Using both these sources we are rethinking the entire development paradigm for the province. We plan to look at all three sectors: agriculture, services and manufacturing. A key priority of our government is small and medium enterprise (SME) development.

Another factor that needs to be kept in mind is the rising interest environment going forward and its economic implications. In the past, a lot of bank lending space has been taken up by the public sector. Banks have also become very comfortable lending to the government. We believe banks need to live up to the job they were supposed to do, which is to have a well-diversified lending portfolio. SME lending needs to increase in overall lending mix.

BRR: Any specific plans on improving financing for SMEs?

HJB: There are some initiatives under consideration. In a rising interest rate environment, it might be difficult for SMEs to pay the mark-up on loans especially when the margins are very lean. We can come up with some sort of an interest sharing mechanism through a fund that we plan to propose.

Another issue in SME lending is collateral. A lot of these fledgling companies especially the micro to small sector are unable to provide collateral to obtain bank borrowings. They might have a great idea and business plan but they don’t have collateral. We plan to address the issue by, perhaps, providing some kind of guarantee. The other initiative we plan on undertaking is building an entrepreneurial fund which provides interest free assistance.

BRR: You have mentioned increasing non-tax revenue in your previous interviews. How do you plan to go about that?

HJB: We are going to do a threadbare exercise for every department. We have repeatedly emphasized that austerity measures have to go beyond cosmetic changes. We will sit with every line department and try to make a questionnaire for each department. Then we are going to look at the non-tax revenue aspect. Our biggest asset is our massive amount of land which is underutilised. We can fund a lot of our development and create economic stimulus in the province if we utilise that land.

In order to achieve this first step is to build a land bank. Once that is there, the land may be used for agriculture or for putting up industries depending on the location and type. This can be done in public-private models or through a lease structure.

BRR: Post 18th Amendment, provinces can borrow subject to approval from the National Economic Council (NEC). Punjab has already done the requisite legislation regarding this. Could you explain your plans for future provincial borrowing?

HJB: As you said the law is pretty much there. While we have the flexibility to go ahead with borrowing, we will not borrow for the sake of borrowing. It has to yield certain socio-economic or financial dividends. When we evaluate individual projects, we will be in a clear position to ascertain which projects are feasible through debt financing.

However, the first option will be to finance projects through the public-private partnership mode. But even though it sounds great, there has been little private sector participation in the last ten years in Punjab. We need to rethink where the bottlenecks are when it comes to attracting private sector investment.

A lot of development has been done in the north-south corridors but east-west corridors have not been touched upon yet. There also a need for development of a golden triangle in the South Punjab region.

BRR: Could you share some details regarding how policymaking will be done to realise development of South Punjab?

HJB: Something to realise is that you cannot look at the entire province with a broad-brush. It has to be looked at from a different lens for South Punjab because it is in a different place in the economic cycle compared to Central Punjab right now. The latter saw a lot of economic stimulus being generated when Sialkot, Faisalabad, Lahore, Gujranwala were provided linkages. Ideally, when the public sector investment takes place in an area, private sector investment follows it.

In the past five years this has not happened. I feel once an area has achieved a certain amount of public sector spending, let the private sector come in and fill this place. Public sector spending should then focus on other areas where there is more need. We will also plan our development expenditure in line with CPEC dynamics so that planned special economic zones are provided adequate infrastructure and market linkages. This is all part of our medium-term development framework for Punjab.

BRR: Which sectors do you feel are the low-hanging fruits?

HJB: Usually, the services sector responds the fastest but low-hanging fruits will also need to be reassessed in light of the rising interest rate environment. Our focus will be on pro-poor interventions particularly to cushion the impact on the lower income segment. As I mentioned our focus in Punjab will be on development of SMEs. We will ascertain the requirements of each sector through stakeholder consultations and then formulate measures accordingly.

The highest unemployment rate is amongst the graduate and post-graduate segment. It’s not in the unskilled labour. Something is not right. We need to gravitate towards more skilled labour. That also needs linkages. All of this is necessary in order to realise the second phase of CPEC. The special economic zones that are being made will also require a supply of skilled labour to make them operational. This is where the fruits shall actually come from.

BRR: What reforms do you plan on bringing as far as taxation is concerned?

HJB: When it comes to tax collection we aim to create a balance. For Punjab, I am not in favour of a house-tax policy and tax collection simultaneously. If you just focus on the collection and that comes by stifling growth, it is not serving the purpose. You will not achieve the desired results. We want to make a robust tax policy unit at the earliest.

As you might be aware, we have suffered a major hit of late from the telecom sector which was almost one-third of the revenue coming in for the Punjab Revenue Authority (PRA). The idea is to enlarge the footprint by getting new cities into the tax net. At the same time, it is necessary to ensure taxpayer confidence in the government. We also plan to introduce debt management rules as well as fiscal discipline laws. Every government should be fiscally responsible and should not leave a mess for future governments like the one we inherited.

BRR: There is a lot of fragmentation when it comes to tax collection in the province. Is integration of Punjab’s three tax departments (PRA, BOR and E&T) under one tax department on the cards? Also, what about integration with FBR’s system?

HJB: When the Punjab Revenue Authority (PRA) was founded, the idea was to replace all other provincial tax collection systems. I feel it is developing nicely so far. We plan to undertake a fresh exercise that will flow to the local government level. We need to decide whether local governments should have their own collections or should the Punjab government be collecting on their behalf.

Another exercise we recently undertook is evaluating the potential under each department. This involves reviewing the progress over the last five years to assess whether tax collection is a core area of focus for them or just a peripheral exercise. I feel the PRA has great scope but it needs to be built on wisely. You just cannot add another department with a different culture and mindset to it because that jeopardizes PRA’s growth. We will break down tax collection and then see.

An advantage that PRA has is that is has relatively better coordination with the federal government. However, there is still a lot of room for improvement when it comes to integration with the FBR and we will work upon that as well.

BRR: What are you plans regarding the local government setup?

HJB: This is the first government that wants to part with power. What we have learnt for the last 70 years is that you need a third tier of government to ensure service delivery. In order to make them potent and functional there needs to be budgetary allocations as well as capacity building at that level. It will have a large financial cost and we are thinking of taking one-third of our ADP development budget down to that level. Those people can probably make better decisions than we can. We have also setup a task-force to build capacity at the district level but it is not an overnight exercise. My own view is to fill those gaps using technology

BRR: Do you foresee some kind of tax collection at the third tier as well or will it just be expenditure?

HJB: Yes, taxation at third tier is needed to provide quality services. Municipal taxation needs to be strengthened. Take the example of Metro Bus. Rather than entire province paying for it, only the people who benefit from it should have to pay. There are people who utilise it and then because these people are utilising it there are less people on the road. Your taxation model should evolve in a way where metropolitan tax should contribute to the subsidy given to the district in question.

BRR: We have heard you saying that there is a problem with the metro bus subsidy. Could you please share your thoughts on this?

HJB: I have actually been misquoted on the metro bus issue. I have never said that I have an issue with the metro bus project. I have even allocated Rs13 billion for subsidies this year. I have just highlighted that operationally there is something wrong with this model if you are pumping in Rs12 billion in three metros running in three cities. It needs to be revisited. My view is that we need to do a threadbare exercise and see how we can increase the revenues. We understand the income level of the people who use it and will keep demand elasticity in mind. We don’t want to burden them. Our focus will be on removing operational inefficiencies to make it better.

BRR: The previous government mulled over giving ownership of power distribution companies (DISCOs) to the provinces. Will the new government in Punjab be open to this?

HJB: If it is without the debt then we can talk about it but I think we have our hands full right now.

BRR: Do you plan on strengthening the provincial bureau of statistics?

HJB: I am very intent on harnessing the role of the Punjab Economic Research Institute (PERI) as well as the Punjab Bureau of Statistics. Improving the capacity of these institutions is of paramount importance in order to make intelligent policy decisions for the future.