1. TAX INCREMENT FINANCING FOR PAKISTAN Salman Ahmed Shaikh salmanashaikh@iba.edu.pk PhD Scholar & Economics Faculty IBA Karachi

2. Presentation Outline  Introduction  Mathematical Model  Possible Hindrances in TIF Application in Pakistan  Pre-Requisites for TIF in Pakistan  Welfare Benefits of TIF in Pakistan

3. Introduction  Housing Needs: 8 Million (Source: World Bank).  Urban Population Growth > Total Population Growth  Reason: Urban Centric Development  Result: Increased Cost of Living

4. House Rent Inflation Source: Economic Survey of Pakistan 2012-13

5. Introduction  Need: Develop New Cities  Reason: Developing Cities Have Positive Externalities  Who Must Initiate? Cities Are Public Goods  Problem: Funding Development Expenditure  Solution: One of the Many, TIF.

6. Basic Idea of TIF  When a public project such as a road, school, or hazardous waste cleanup is carried out, there is often an increase in the value of surrounding real estate and new investment.  This increased site value and investment sometimes generates increased tax revenues.  The increased tax revenues are the "tax increment".  TIF dedicates tax increments within a certain defined district to finance debt issued to pay for the project.  TIF is a tool to use future gains in taxes to finance current improvements which will create the conditions for those future gains. This tool is widely used in U.S and in Europe.

7. Basic Idea of TIF

8. Mathematical Model

13. Possible Hindrances in TIF Application  Low Rate of Savings Source: Handbook of Statistics on Pakistan Economy It is hard to attract investment funds in a country with very low rate of savings.

14. Possible Hindrances in TIF Application  Tax Haven for Elite Class  Lowest Tax to GDP Ratio among IMF Classification of Middle Income Countries.  Only 2% population are registered taxpayers. Source: Ministry of FinanceSource: IMF

15. Possible Hindrances in TIF Application  Fiscal Deficit Eats Up Development Funds Source: Ministry of Finance

16. Possible Hindrances in TIF Application  Lack of Documentation  Large Informal Economy.  ‘Benaam Zameen’.  Flawed Documentation with False Valuation.  Capitalistic Democracy Provides Status Quo Incentives

17. Possible Hindrances in TIF Application  Lack of Investor Confidence in Public Policies.  Policy Reversals  Case in Point: Engro  Case in Point: Uncertainty in Energy Distribution

18. Possible Hindrances in TIF Application  Inefficiency in Public Sector  Lack of Trust  Poor Delivery & Service Record  Corruption & Governance Failures  DFIs Prefer NGOs Over Government

19. Possible Hindrances in TIF Application  Lack of Political Will  Capitalistic Democracy Provides Status Quo Incentives

20. Pre-requisites for TIF in Pakistan  Engage Remitters & Big Investors for Seed Capital  Remittances Increased After 9/11 Went in Stock Market & Real Estate Mostly Potential: People Prefer Real Estate Investments After Market Crash Source: Economic Survey of Pakistan 2012-13

21. Pre-requisites for TIF in Pakistan  Engage Banking Liquidity for Initial Funding.  Banks Prefer T-Bill Investments Over Private Lending  Islamic Banks Have ADR of 35% Only. Source: Islamic Banking Bulletin, SBP, Various Issues

22. Pre-requisites for TIF in Pakistan  Connect TIF with Tax Amnesty.  Connect TIF with REITs.  Compliment TIF with Energy Financing.

23. Welfare benefits of TIF in Pakistan  Reduce urban congestion  Reduce urban crimes  Reduce prices of real estate  Widen the urban centers  Generate employment in new urban centers  Facilitate closer migration to wide choice of urban centers  Create new growth nodes and production zones.  Reduce ethnical conflicts that arise from ethnical diversity in congested urban centers.

24. Thank You For Feedback & Queries Salman Ahmed Shaikh IBA City Campus, Garden Kiyani Road, Karachi, Pakistan Ph# 0334 – 3193395 Email: salmanashaikh@iba.edu.pksalmanashaikh@iba.edu.pk Web: www.islamiceconomicsproject.wordpress.com