Transparency indicts Pakistan at critical time

Transparency indicts Pakistan at critical time

By Ansar Abbasi

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, hyperinflation, a reduction in the Karachi Stock Exchange 100 Index, a sizeable depreciation of the currency, a substantial reduction in foreign currency reserves and a huge trade deficit inherited from the previous government.


Banking fines 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 firmly 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 Pakistanís industrial base.

In October 2007 a new Competition Commission was set up under the Competition Ordinance 2007, in order to ëprovide for a legal framework to create a business environment based on healthy competition towards improving economic efficiency, developing competitiveness and protecting consumers from anti- competitive practicesí.

It was also meant to ërestrict the undue concentration of economic power, growth of unreasonable monopoly power and unreasonably restrictive trade practicesí, which are perceived to be ëinjurious to the economic well-being, growth and development of Pakistaní. In one of its first initiatives, the Competition Commission challenged the Pakistan Banks Association (PBA) on its decision to ëcollectively decide rates of profit and other terms and conditions regarding deposit accountsí. The PBA is a membership association to which only banks in Pakistan can be affiliated, 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 ëa four per cent profit on Rs20,000 deposits and a Rs50 charge on less than a Rs5,000 balanceí on bank accounts included in the new Enhanced Savings Account (ESA) scheme. 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-holdersí prior permission.

On 24 December a ëshow-causeí was issued to the PBA and the banks, and they were asked to provide justification of their behaviour to the commission by 10 January 2008.

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 ëat the behest of the regulator (the State Bank of Pakistan) in the larger public interestí. The PBA also argued that it could not be considered to be stifling 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.


The final decision of the Competition Commission was made on 10 April 2008. The commission argued that the ëPBA has acted beyond its mandate…and has been instrumental in the formation of a cartelí. As a result, it had deprived small account-holders of the benefits 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 fines. The PBA was fined Rs30 million, and the seven banks involved were fined Rs25 million each. 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.

The commission appealed against the high courtís decision, and on 15 September 2008 the Supreme Court allowed the commission to proceed against the banks. The Competition Commissionís 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 of Pakistan Steel Mills: Corruption in privatisation in Pakistan is endemic: manipulation of the process can be found at all stages, from the evaluation of profits 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 Pakistanís 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. 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.

In 1998 the privatisation of Pakistan Steel Mills was abandoned, and to make it profitable the labour force was reduced from 20,000 to 15,000.

As the steel mill had been designed, constructed and fitted out entirely by the Soviet Union, in February 2003 General Musharraf visited Moscow and signed an agreement to expand the production of the plantís 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.

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.

The Supreme Court concluded that approving the award of the contract reflected disregard for the mandatory rules, as well as the information necessary for arriving at a fair sale price.

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 ëvitiated by acts of omissioní and violated the mandatory provisions of laws and rules. The valuation of the project and the final terms offered to the consortium were not in accord with the initial public offering given through the advertisement.

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 filed 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 ñ corruption as defined in section 9 of the National Accountability Bureau Ordinance 1999, which covers corruption and corrupt practices.

If found guilty, they would be subject to punishment, up to fourteen yearsí imprisonment, under section 10 of the ordinance for their involvement in the attempted privatisation of Pakistan Steel Mills. 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. (Concluded)

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