Loan shark?: Despite past failure, World Bank offers another loan

Undete­rred by failur­e of first tax reform­s projec­t, agency propos­es anothe­r progra­mme.  Despite coming away empty-handed, the country is nonetheless paying a 3.5% mark-up on the borrowed amount. ILLUSTRATION: JAMAL KHURSHID


A team of World Bank ‘consultants’ has arrived in Pakistan to convince decision makers to avail a $300 million loan for a second phase of tax reforms. The group was also involved in the first phase of the same project, which the World Bank itself admitted was a “failed” one.

After the abortive $149 million Tax Administration Reforms Project, known as TARP-I, the World Bank has sent more or less the same team to devise a roadmap for TARP-II. Sources say that the project objectives will be more or less the same – enhancing tax revenues and introducing reforms in the tax machinery.

Michel Zarnowiecki, an expert in customs affairs, and William Mayville, an adviser on human resources training, are again in town to ‘tell’ how Pakistan can upgrade customs and border management in Pakistan and how it can strengthen its human resources base.

These two areas formed major components of the failed TARP-I initiative, which continued for almost seven years without achieving anything significant. Due to its disappointing outcomes, the World Bank, in diplomatic language, had admitted that the programme was “moderately unsatisfactory”, wherein the World Bank’s was “moderately unsatisfactory”, and the borrower’s performance was “unsatisfactory”.

Against the initial promise of $149 million, the World Bank’s actual disbursement was reduced to only $47.6 million. Despite coming away empty-handed, the country is nonetheless paying a 3.5% mark-up on the borrowed amount.

According to an official in the finance ministry, international lending agencies have been sucking the country dy. “Most of the money they give in the name of reforms is flown back to them as loan fees, consultant fees, and training and programme management fees,” he criticised.

The World Bank deducted $2.2 million (almost 5%) from the loan it earlier extended in the name of ‘capitalised charges’ and ‘loan origination fee’. Similarly, consultant services consumed $7.3 million, our sources said.

When Pakistan availed the TARP-I in 2004, its tax-to-GDP ratio was 11.5%. It slipped to a dismal 8.6% by the end of the first phase of the project. Another important objective – increasing electronic tax returns filers – remains an area where the Federal Board of Revenue’s (FBR) entire data is suspicious. As against 1.5 million supposed tax filers, the actual number was just above 800,000.  According to another objective, tax arrears were supposed to be reduced. Instead of a reduction, the actual figure shot upwards many times the baseline.

The TARP-I team forced Pakistan to implement a ‘voluntary compliance’ method, instead of letting tax authorities go after taxpayers. Voluntary compliance means taxpayers declare their own taxable assets, instead of the authorities going after their personal accounts. According to an FBR official, this was the biggest flaw in the first phase of the project, which was subsequently exploited by tax dodgers.

“Due to an ‘imported’ self assessment scheme, the FBR has failed to reintroduce audits despite making three separate efforts in the recent past,” an official said. “Every time the FBR wants to initiate an audit, taxpayers challenge it in court on the grounds of ‘self assessment’.”

The Washington-based lending agency has already given $3 million for a project preparation facility (PPF) for TARP-II. Most of that amount will be paid to the same consultants who designed the first (faulty) programme.

While defending the proposed programme, the FBR says the next phase of tax reforms will look at areas which were not visited in the earlier phase of reforms. FBR Chairman Ali Arshad Hakeem said the handling of the first phase was the main cause of failure.

The Planning Commission has already opposed TARP-II, our sources said.

Published in The Express Tribune, February 23rd, 2013.

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