Institutional development Regulators and Pakistan's economy

Invariably, all discussions on politics and economy of Pakistan end up with the conclusion that our 'institutions' are weak or there has been no institutional development in the last 70 years. This statement appears to be correct. The objective of this article is to identify the evolution of 'institutions' especially those related to economic affairs in the modern market based society. There has been a changed role of state than what we used to conceive in the past. In order to focus on the economy and business, this discussion is limited to the institutions directly related to economic affairs only. In the following paragraphs, an attempt has been made to discuss the concept and relevance of 'Regulators' with reference to institutional development.
What is a 'Regulator'? Why regulators are essential in a modern state? Many such questions are to be answered. Detailed discussions on the role of regulators are available in international literature that are also available on internet, however, this is not the subject of this article. This article has been written with a completely different dimension. In the author's view, there are particular and unique structural, political, social and bureaucratic features encompassing Pakistan as a state and society that needs to be fully taken into account to understand the effective role, if any, of regulators in the country and to summarize the subject of institutional development.
After almost thirty years of experience in the field of finance and its related subjects, I believe that one of the major problems facing this society is the role, nature, competence and relevance of 'regulators' in our society, especially after the economic reforms in 1990. We continuously harp on the issue of corruption, which we all agree cannot be reduced without institutional development. An effective regulator is the necessary ingredient in a market based economy. We, as a state, are in a fix. We want market economy without corruption, however, as a society, we do not endevaour to establish and assist in establishing efficient and empowered regulators.
'Market economy' that gained unfettered supremacy after the fall of Soviet Union in the 1990s promoted the role of 'Regulators' for all sectors and segments of the society. This is in addition to existing system of ministries within the executive. It is an evolution, not an accident. The role of regulators is especially relevant in developing countries, like Pakistan, on account of weak political system, nepotism in selection and promotion in bureaucracy, colonial legacies of vested interest groups, etc. Regulators in the form of State Bank of Pakistan [SBP] have existed for over 70 years, however, their role and autonomy has transformed completely after 'privatization' of banks and independence of the SBP Board under the revised legislation. The issue of distinction between the ministries (executive) and regulators emerged in fully-grown form in the 1990s. What is this subject and what is its particular reference in Pakistan is the content of this article.
Relevant regulators in economic sense
The relevant regulators in economic sense in Pakistan are listed as under:

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    Sector                                Regulator

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1.  Scheduled Banks                       State Bank of Pakistan

2.  Corporate Entities & Stock Markets    Securities & Commission of Pakistan

3.  Taxation                              Federal Board of Revenue

4.  Competition                           Competition Commission Pakistan

5.  Oil & Gas Sector                      Oil & Gas Regulatory Authority [OGRA]

6.  Power Sector                          National Electric Power Regulatory Authority [Nepra]

7.  Electronic Media                      Pakistan Electric Media Regulatory Authority [Pemra]

8.  Telecommunication                     Pakistan Telecommunication Authority

9.  Aviation                              Civil Aviation Authority

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The aforesaid list includes only 'nine' (9) regulatory bodies. There are others as well. Nevertheless, if we examine the day to day affairs of common business persons then it transpires that the aforementioned nine institutions are the ones which encompass almost all relevant commercial and business spheres. Politics and political development in Pakistan may not remain so important if there is trust on the efficacy and efficiency of the aforesaid institutions. The US society remains stable regardless of whether Donald Trump or Barrack Obama is the President's office. Why that does not happen in Pakistan. In every developed society, institutions remain relevant and personalities do not overpower them. This is what is called 'trust' on the system. There is a distinction between institutional operations and political developments. In our country, everything revolves around personalities. The purpose of this article is to identify the process through which we can get out of this trap. This is an essential requirement for sustainable change.
Every businessperson directly or indirectly deals with the aforesaid regulators. There is constant and genuine complaint about corruption, inefficiency and lack of competence in the spheres dealt by some of these regulators. However, in that discourse we forget the basic question whether or not we have created effective 'regulators' in real sense, which every market economy requires or are they merely new names for the functions which were previously done, may be in a better way, by ministries? This important issue is often ignored whilst discussing the evolution of the next stage of market economy.
Why do we need regulators in additions to ministries?
In Pakistan, except for SBP, almost all the 'regulators' evolved in post 1990 era. This era was the zenith of market economy and privatization in the world with Margaret Thatcher and Ronald Reagan in power in the western society. We diligently follow their footsteps. In my view, that was a right approach as market economy has its own essential requirements. Previously, we had regulators with a different role such as 'Monopoly Control Authority', 'Controller of Capital Issues', 'Controller of Insurance', etc. In my view, such authorities were 'controllers' not 'regulators'. Their role was to control not to facilitate.
For a common man, the first question is need for a separate authority in the form of a 'regulator' when the same functions in the past were being done by the ministries. For example, Ministry of Petroleum was doing, in addition to its other functions, what is now being done by Ogra. So why do we need Ogra? This is a very relevant question. On the basis of international literature, even if we conclude that there is a need for a regulator in the form of Ogra, the second and subsequent question, especially with reference to Pakistan, is whether any difference that has emerged for the common man or state in general on account of the creation of an additional national body by the name of Ogra. The author personally agrees with the idea of 'regulators' in every relevant sector and segment of economy and the rationale for the same will be dealt in the following paragraphs, however, our domestic shortcomings on the matter need to be corrected, otherwise the said process will not be anything more than an additional layer of bureaucracy.
Regulators and market economy-essential features
There are three principle players in every state in the economic and related fields. Primary role and responsibility lies with the 'legislature' to frame economic policies for the welfare of state and its people. That role cannot be deprived or abdicated in any manner. All experiments other than 'common franchise' will ultimately fail. Lack of political involvement in the economic policies is one of the reasons of present state of affairs of economy. Legislature achieves its desires by the executive. We call them ministries. What is 'executive' or 'government' in legal sense has recently been enunciated by the Supreme Court in 'Mustafa Impex' case.
Primary economic policies are to be made by the executive and they become implementable if they get the consent of the legislature. Ministries and divisions are not there to make policies but to assist the political forces in framing policies and its execution. However, in practice, if we see the ground realities in Pakistan we realize that legislature and political forces, primarily due to their own faults and shortcomings, have abdicated the role of making economic policies. That role has been adopted, by default, bythe ministries led by bureaucracy. This is a wrong approach. Nevertheless, in essence, this is a political debate and not the purpose of discussion here. This article deals only with the relevance and role of regulators in market based economy. The purpose of regulator in between the legislature, government and ministries is the subject matter here. This analogy needs to be read with the following features that has led to the development of the concept of regulators in addition to relevant ministries:
(i) Specialization: In this age of specialization, there is a need for special 'technical' knowledge that cannot be expected from executives hired on generalized basis. For example, there is a need for highly qualified technical persons to understand the intricacies of telecommunication sector. That resource can only be available in a 'regulator' and the same is not expected in regular executive cadre. This is true in case of almost all regulators. This, however, does not mean that an executive, if properly trained, cannot contribute as a part of regulator;
(ii) Continuity: Continuity of 'tenure' and consistency can only be made possible in a time-bound employment on a particular job for a certain period. This can only be possible in a regulators such as time bound tenure for Governor SBP, Chairman Nepra, etc.;
(iii) Financial autonomy: Financial autonomy is another factor that is generally not conceived properly in our society. Regulators are generally empowered to deal with market participants in the manner that their financial needs are fulfilled without any support from the national exchequer. Unlike the regular system, surcharges and payments for non-compliance by the regulators are market based that provide adequate resources for the regulator to conduct their function without government support and hassles of budgetary constraints. This improves the independence of the regulators;
(iv) Interaction with public: There is an inherent possibility in case of regulators, unlike ministries, for public interactions. This can be done by way of 'public hearings', complaint redress mechanism, etc.
(v) Location near the market: Unlike the government and the ministries, regulators can have their location and principal seat in other than in the political capital of the country. SBP is in Karachi. Reserve Bank of India is in Mumbai. Securities & Exchange Commission of USA is based in New York not Washington. There is need for change of paradigm on this matter in Pakistan. It is an administrative common sense matter not a political issue;
(vi) Lack of conflict of interest: Regulators are essential part of the state, however, inherently their powers emanate from legislations other than those dealing with the operational matters. In that sense, there is generally no conflict of interest between the objective and action of the regulators and executive. An independent Monetary Policy Board of SBP is expected to decide any matter placed before it in a manner better than Ministry of Finance, say the discount rate. Incomplete execution of this basic principle is the primary problem in the case of Federal Board of Revenue where 'policy', 'regulation' and 'execution' all rests with one authority having direct conflict of interest, being collection of taxes in rupee terms. We are putting undue pressure on persons and institutions that is hampering their working capabilities;
(vii) Human resource development: A regulator is expected to develop human resources with special training to undertake its functions better than a general system designed in governments.
(viii) Non-dominant market: Evolution of regulators is the next stage of non-dominant markets. It is the second stage of privatization. One of the primary problems being faced by Pakistani regulators and many other developing countries is the dominant presence of 'government owned' business entities in the market. Here, executive is also a player. This directly, indirectly and inherently affects the role of regulators. Dominant role of PSO and OGDCL may affect Ogra, government-controlled generation, transmission and distribution of electricity throughout Pakistan except Karachi may be a handicap in ascertaining comparatives for a privately owned entity by Nepra. PIAC is burden for CAA. These are practical problems, not related to a particular case.
These eight ingredients of regulators can change the whole paradigm of the institutional efficacy and efficiency in the market based economy. Regulators in essence are professional/technical support and advice to the executive that may not be otherwise available in ordinary executive structure. Do we in Pakistan really accept this fundamental change or the need for that change? The second question is whether we have empowered our regulators in that sense? Whenever we discuss the roles of civil versus military rule in Pakistan, we deal with personalities without fully appreciating the fact that state 1990 onwards is not what it used to be in 1950. The fundamental issue, in the economic sphere, at least to the extent of administration, is acceptance of the role of regulators and the space and place to be given to them for operation. Let us admit that results in our case are not admirable.
Pakistan's experiences and the way forward
In Pakistan, it appears that there is lack of awareness in differentiating the roles of 'ministries' and 'regulators' and the role an empowered regulator can play in reducing corruption. People at large cannot be blamed for that as it is a comparatively new experience. Based on our ground realities, it has to be accepted that, in practical sense, it becomes very difficult for the persons being regulators to resist the political pressure due to defects and legacies of our political culture. Nevertheless, on overall basis there is an improvement. Such firewall, or social strength, can only be provided by a strong civil society. This is the test and the sign of a strong and civilized society.
Another problem that is generally faced in Pakistan is the extent of the roles of regulators and the ministries. There is apparent overlapping in certain cases. An example is Securities & Exchange Commission of Pakistan. It is a very efficient regulator. However, incorporation of a company and its operational administrative matters such as filings of documents, etc., are not the role of corporate regulator. It is a ministerial/executive job. In the UK, the same is done by 'Company House'. In India, it is done by Ministry of Company Affairs, etc. Same is the case with USA. What we need is 'streamlining' the role of the regulators whereby they are separated from the functions required to be undertaken by the executive. A lean and efficient regulator is better than unwieldy bureaucracy.
Location of the regulator away from the market place is another problem in Pakistan. Stock Exchange exists in Karachi. However, unlike India, USA and any other country, the primary regulator is placed in a city different from the market. In fact, the whole concept of regulator has been designed to get the market based economy nearer and closer to its regulators. This is common sense not a political issue. Market cannot move. Regulators can.
Other than the issues discussed above, the foremost problem in our country is the nomination and selection process for the persons in regulatory bodies and regulators. There is no ideal system. However, in every modern society, there is a concept of an effective 'Nomination Committee' and the process of 'Public Hearing' before the public representatives. Such appointments are not made on the desires/discretion of head of executive though he/she remains the focal person in the whole process. This brings in transparency and trust in the minds of people.
In summary, the purpose of the aforesaid brief deliberations is to identify that there is gradual development and evolution in every society. When we have rightly decided to move towards market based economy then we should also appreciate that the same can only be achieved by efficient and independent regulators. We in 2017 are poised for a changed political, social and economic environment. However, it is necessary to appreciate if the same will be a change in personalities only, in that case we will move around in circles and would remain under same trap. There is a need for a new prism to visualize the issues this state is facing. All the issues, can gradually be resolved, however, there is need for prioritization.

Copyright Business Recorder, 2017