Sunday, October 28, 2012

Karachi's Financial Deadlock

To the outsider, Karachi is a rich city, having the lions share in Pakistan’s economy and contributing almost 70% to Federal Government by taxes. Being the headquarter of all banks, media, insurance houses and the country's biggest stock exchange, this is precisely why it doesn’t make sense that its city government is poor.

 It is so poor, in fact, that it cannot pay its sweepers. Last month much of its sweepers went on strike to protest that they had not been paid in months and that they will continue their strike till Eid ul Adha when thousands of animal bodies will be piling up on the city's main roads and streets.

Imagining the horror, a bailout came in the form of a Rs276 million, reportedly from property taxes, distributed to the towns to help with garbage disposal. But this is a typical stop-gap arrangement.

The problem to Karachi's economic woes comes from the government of Nawaz Shariff when he made a decision that led over-reliance on Islamabad and Sindh government.  As a result, its bank balance has not been able to keep up with the city’s growth and the parallel swell in the thousands of staffers required to run the city.

Karachi's Management Prior 1998
Karachi used to receive a lot of money from an octroi and zilla tax levied on the movement of freight within its municipal limits. But it was abolished in 1998 and replaced with a more streamlined 2.5% general sales tax (GST). Karachi’s share then was fixed at 61% of the GST collected in the city which was around Rs3.9 billion at that time. It was enough for the city government back then but as Karachi’s business muscle flexed,  GST collected has gone up to Rs37 billion but the city government is still getting Rs4 billion which is truly unfair.

In the middle it was decided to give Karachi more from GST, which was easily levied on the sale of goods and services. It went up from 12.5% to 15%. About 2.5% was set aside for the local governments. But slowly the city government grew in size as Karachi expanded and its need for municipal services required more hands on deck.

When Karachi ask for more money from Sindh government to keep its services running, the Sindh government responded by saying that the city needs to manage it purse better despite Karachi's premier role in Pakistan's Economy and much of the Sindh government taxes are collected from Karachi.

Sindh government point of view
“From Sindh government point of view, the problem is financial indiscipline in the city administration. The local governments have hired more people than they need and now we are paying their salaries.” Indeed, just take the example of the sweepers. The Sindh government is giving the city Rs850 million every month in grants just so the Karachi Metropolitan Corporation can pay staff. “In the last couple of years, the city governments and the towns have hired thousands. No one has bothered to question the sustainability of such a large administration. And now they are facing difficulties,” said the Sindh finance official.

City government point of view
In response to this, the city has two things to say. Its first argument is that as Karachi grew in size (20 million) it would naturally need more staff to manage it. In 2001, it also had to adopt 10,500 Sindh government employees when the local government ordinance was promulgated, creating the City District Government of Karachi. “That also jacked up our expenditure,” said Amir Khursheed, a former finance director. It didn’t help that the federal government has been raising salaries continuously. When that happens, the provincial and city governments have to follow suit, even if they can’t afford it. “[Islamabad] has raised salaries by a cumulative 255% since then,” said KMC’s Imam. “Obviously, we have to increase the pay of our own employees otherwise there would be havoc.”

Current Status
Karachi’s budget for 2012-13 is Rs31.5 billion and half of this will come from the provincial government. Many of the mega projects, like flyovers, are also financed by the Sindh government. Karachi also gets a high share from the Sindh government when it comes to development spending – money the city doesn’t need to spend.

“Karachi’s reliance has increased so much on the provincial government that there is no effort to increase local taxes,” said the Sindh finance official. For 2012-13, KMC has set a target to earn Rs25 billion on its own from billboard advertisement taxes, charged parking, income from hospitals, the zoos, parks. But every year KMC spends more than it earns. It could possibly raise its rates, but as KMC’s Imam says, “If we jack up the charged parking from Rs10 to Rs15, people are going to shout.” The only problem is that KMC has weak control over its ground staff. Its contractors charge people up to Rs50 for parking when the rate is officially Rs10. There is no count of the number of billboards and no one is ready to share details about outdoor campaigns on roundabouts, underpasses, flyovers and even at the beach park.

Officials say the debate boils down to a political deadlock between the Muttahida Qaumi Movement and the Pakistan People’s Party. They need to decide on the real requirement and revisit the dependence on the provincial government. “Whenever the city faces a problem, the MQM will go to the President and then money will be released as a stopgap measure,” said economist Kaiser Bengali, a former adviser to the Sindh government. “There are no penalties on a local government if it overshoots spending.” The Sindh government is perhaps right when it complains that the city needs to tackle corruption and plug leaks.

There were no checks and balances on how much local governments were spending during the Musharraf era when they were created. In fact, they refused to be audited for a decade from 2001. The first audits were only just conducted and revealed alarming rates of embezzlement. One solution is a strong provincial finance commission that could settle the resource distribution once and for all. It was last set up in 2007 to decide how much local governments will get from income earned by the province.

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