The 0.25% levy on exports (except the few exempted products) has been there since 1991. It yields something like 5 billion rupees a year, sometimes more sometimes less, depending on the value of exports. Most of it, about Rs 35 billion, has been 'high jacked' by the Ministry of Finance to dress up its fiscal deficit numbers.
The 19-member strong Board that manages the EDF affairs has 10 officials and one MNA. The remaining eight slots are distributed among FPCCI and two regional chambers (Quetta and Sarhad), and five trade associations whose share in our total exports is less than 10 percent. The major contributors to the EDF are not represented on the Board.
When demand exceeds supply, as is the case with EDF, you apply certain filters; a kind of a ranking mechanism to direct scarce resources to initiatives promising greatest returns. EDF has no laid down selection criteria. This ensures misallocations and misuse - and allows enormous discretion to Ministry of Commerce to fund its pets. There are instances galore of favours being dished out, of a kind that has nothing to do with exports. Some examples: rent etc of Quetta women's club; brick and mortar projects like SAARC chamber building, proposed Quetta EXPO centre, FPCCI Islamabad office; various subventions to government bodies. It is also dipped into for trade fairs (for which TDAP has its own funds), 'strengthening' of Trade Offices (who have their own budgetary allocation), and meeting the running expenses of certain chambers of commerce (in the garb of R&D support)
At any given time, there are more funds committed for various projects than funds available. We are told the 'throw forward' (the bureaucratese for projects in the pipeline for which funds have been released or committed) is now so large that at current cash-flow levels no new projects can be entertained for the next few years.
Propriety of expenditure and value for money are central elements of a responsible system. EDF ensures neither. There is no audit of EDF expenditures by the Auditor General (ostensibly because these are exporters' funds and not of the government), and a robust Monitoring and Evaluation system is conspicuous by its absence.
The example of leather sector is particularly instructive. Over some 20 years, EDF Board kept allocating funds to this sector, totalling close to a billion rupees, without so much as a perfunctory look at expenditure details and their contribution to leather exports. It so turned out that leather exports came down, quite significantly, despite the EDF largesse. Over the comparable period, Indian leather exports doubled.
There is overwhelming evidence of disconnect between EDF spend and export growth. Indeed, the Ministry will be hard pressed to quote a single shining example: a well thought out initiative that has a clear linkage with export development. Hiding behind the smoke screen of intangibles (results can't be quantified) or gestation (more years needed to show results) not allowed.
Clearly, we need a directional change. Three routes offer themselves for consideration. Route one: do away with this surcharge. Those who ride the EDF gravy train, the government included, will resent the abolition. Exporters will welcome it. Exporters don't think it is fair to use their money to finance the fiscal deficit, or become MoC's slush fund. It won't take the sting out of held-up refunds, but better a straw out of the beard of a muscular thief than getting mauled by him!
Route two: be upfront about it and give up the charade of using this fund for export development. Accept you are taxing exports. These receipts will then form part of government's tax revenues, to be used the same way the other revenue streams are used - or misused. If in its benevolence government wishes to make a budgetary allocation for export development by all means let it be managed by the MoC in a manner it deems fit. The Exporters will have no case to 'manage' the fund if it is part of the budget. Government already allocates funds to TDAP under the EMDF (export marketing development fund) and we don't question TDAP's authority, or, for that matter, the misuse of EMDF.
Route three: reform the system. This would require, first and foremost, an acceptance by the MoC that it is not its business to manage the Fund, nor is it equipped to do so. MoC should be the policy maker, not the executor. Give to Caesar what belongs to Caesar: let exporters be in the driving seat.
While the exporters have their strengths - who would know better what interventions work best - it will not be wise to leave the field entirely to them. We are all for checks and balances, to mitigate the conflict of interest risk and ensure Accountability, so long as the baby is not thrown out with the bath water.
The most efficient structure will be an incorporated company, managed by a government nominated Board (three-year term), consisting of exporters, private sector professionals, and academia. Chief Executive of TDAP can be the ex-officio Chairman of the Board, and include a non-voting member from the MoC for co-ordination purposes.
The proposed company, headed by the CEO (a professional appointed by the Board), would have a lean structure with partnerships with reputed organisations (eg IBA, LUMS, PBC) for technical support (selection criteria, appraisal of proposals, monitoring and evaluation). The Board will submit an annual report on its activities and performance to the MoC.
All this will of course require amendments to the EDF Act. But these will be of no consequence as long as MoF retains its ability to withhold all or part of the EDF collection. The law will have to be amended to allow the State Bank to directly credit to company accounts the entire amount of export development surcharge. Will the Engineer rise to the occasion and give EDF a chance?
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