Like other countries, Pakistan is anxious to enhance the rate of economic growth, employment and the well being of its people. The government augments resource availability through foreign loans and foreign direct investment (FDI). The government has continued policy reforms and the foreign investors have again started looking at the business prospects in the country. Last year Pakistan was able to achieve 50% increase over FDI for the previous year, though the annual target of $600 million could not be achieved. Prospects are, however, improving. FDI for July 2002 at $42.4 million is an improvement over $24.4 million for the corresponding month last year. Expectations are that this year, FDI may reach one billion dollars, the level earlier achieved during 1995 and 1996. FDI is sought with the expectations that additional economic benefits so generated would many-times cover the outflow by way of interest and dividends, without over-burdening the country's existing resources. From FDI, normally both sides should benefit. However, this is an ideal situation and the position may not be so, at least in some cases. This paper is an attempt to explore the FDI that is preferable for our purpose.

HISTORICAL SOURCES OF FDI

FOREIGN PRIVATE INVESTORS: Foreign investors are continuously looking for attractive opportunities. Profit is the main motive. Rate of return available locally might not be high enough so some enterprising people look beyond borders for attractive investment opportunities. As shrewd businessmen they weigh the risks and rewards of investment in different countries. Their missions abroad help them with relevant information including investment protection laws, legal system / the courts, general law and order situation and a host of other related factors. To satisfy them they also seek information and clarifications from the Boards of Investments or similar authorities of the short-listed FDI recipient countries. Based on information and analysis, they finally decide to make the investment in a particular country or sector. The developing countries should facilitate the process by providing relevant and reliable details.

FOREIGN COUNTRIES AND INSTITUTIONS: Foreign countries and institutions are also on the look out for investment abroad. However, for them the profit motive is secondary. Their investment in a particular country sends positive signals to the individual investors and therefore this source might be fully supported. Saudi Arabia, China, Kuwait, Oman, IFC, ADB, IDB and similar other countries and institutions have invested in Pakistan in one-way or the other. In the context of post-privatization structure of KESC, institutions such as IFC, ADB etc may consider acquiring stake, as KESC needs at least $400 million new investment to overhaul its aging system.

PAKISTANI EXPATRIATES: Rich Pakistani living and working in the US, UK, Middle East and other countries have a desire to invest part of their money in industries or businesses in the country. Many of them have made substantial investment while some of them had to suffer delays or other problems mostly because of the non-transparent and inconsistent policies of the successive governments. These expatriates might have withheld further investment due to real or perceived discrimination by the successive governments in dealing with foreign investors and the Pakistani expatriates. Their common complaint has been the inconsistent government policies over the past decade. Things have recently improved and Pakistani expatriates visiting the country for investment speak highly of the BOI and other government departments. However, much more needs to be done to allay their apprehensions.

FACTORS INHIBITING FDI GROWTH

LACK OF CONSISTENCY IN POLICIES: Policies have been changed often with the change of government. Same governments have also changed policies to the disadvantage of the investors. This makes planning difficult, adds uncertainty and enhances risk. In today's competitive world, investors before making investment in a country, take into account continuity and consistency of its policies. Foreign investors are inhibited if they perceive that government authorities are unreasonably delaying things or are delaying matters for insignificant reasons. Quick and judicious decisions by the government shall rehabilitate the confidence of the foreign investors. In a seminar held in Pakistan a few months ago, certain international investors asked for removing a number of administrative and policy related irritants, as the country with its strategic location can become an attractive destination for the international investors. Reportedly there are four assemblers of Chinese motorcycles in Pakistan who are unable to market their products as the government has put restrictions on registration of such motorcycles. The government is urged for an early resolution of this issue, as well as other similar issues.

LAW AND ORDER SITUATION: Investors are usually perturbed from poor law and order situation in the country. Their priority is the safety of their lives and that of their employees and the security of project assets. They and their families wish to live in peace and carry out their usual chores without having to look over their shoulders all the time. In case they feel threatened, in any way, they would relocate to other countries. They know their investments can be taken care of by their respective governments, if need be. Our efforts should be to make living safe for all. A recent delegation from Japan was of the view that the government has to go beyond coining the slogan 'Love Pakistan' by ensuring security and safety to foreign investors. Pakistan should remove all irritants.

ACTUAL OR PERCEIVED DISCRIMINATION: It has been reported in the press that the foreign investors were provided with sovereign guarantees for protecting their locally produced products against the imported items but similar protection was not offered to products of some of the industries owned by Pakistani expatriate. A number of industries owned by the expatriates suffered due to untimely withdrawal of tariff protection or other policy changes, which altered the very grounds of financial viability. The government might consider quick actions to redress the problems of the local Pakistani businesses or the problems faced by Pakistani origin expatriates. Presently the impression is the government does not care much for Pakistanis and there is urgent need to remove this impression. Level playing field may be provided to the local and foreign investors for all new attractive business opportunities.

WHOLE-LOT PRIVATISATION OF LARGE UNITS: The privatization initiative offers attractive opportunities for the investors. Big deals need big amounts that the local investors might not be able to muster for the competitive bidding purposes. Similarly, privatization offers are often big whole-lot deals, with little or no consideration for structuring deals in ways that enhance greater participation by local entrepreneurs. Privatisation policy might be suitably modified.

INVESTMENT-SHY LOCAL INVESTORS: Many foreign investors judge the investment climate in a country by looking at the investment being by the local investors. All countries have local entrepreneurs who have been doing business for decades and promoting economic well being of the people. Being sons of the soil they are in a much better position to understand local conditions and investment environment. However, these people have no support or backing from international institutions or press to take up their cause should the government of the day decide actions that are not in the best interest of the local businesses. Recently a visiting Japanese delegation of business representatives said that they would like Pakistanis to invest in their own country before seeking foreign investment. As part of FDI promotion, the government might encourage domestic investors to explore joint ventures with the foreign parties. China is reportedly interested in joint ventures in textile made ups though overall it has shown interest in oil and gas exploration.

MEASURES FOR ATTRACTING FDI

The government has initiated a number of actions to make Pakistan an attractive destination for FDI. Some of the measures are:

1. Board of Investment (BOI) has been strengthened and its workings streamlines. BOI is establishing liaison with prospective FDI investor countries and businesses informing them that Pakistan is providing facilities and removing all the bottlenecks and irritants. The Chairman, BOI was recently quoted of saying that consistency in policies would be ensured to restore confidence of the investors. He added that private sector has been involved in policy making to remove bottlenecks in the way of foreign investment in Pakistan. BOI will be helping the businessmen investing in Pakistan at policy and operational level.

2. The government has evolved investment strategy giving emphasis on privatization, liberalization and deregulation, which has resulted in improvement in Pakistan international credit rating. The government has been actively working to reduce irritants and to make the investment climate even more conducive. Measures in this regard include introduction of the tax reforms, introducing of tax friendly regime and anti-dumping laws. Reforms in many other areas are under consideration and are expected implementation shortly.

3. The government reportedly is giving highest attention to: (1) assessing existing regulations and procedures that affect the interaction between the administration and the business with a view to eliminating red tape and with it corruption opportunities; (2) Judicial reforms aimed at strengthening the rule of law and enhancing the transparency and accessibility of the legal system by modernizing the court system at all levels; and (3) strengthening the capacity, effectiveness, and accountability of law enforcement agencies.

RECENT DEVELOPMENTS

PHYSICAL INFRASTRUCTURE PROJECTS ON BOT: Build Operate Transfer (BOT) appears to be the recent preferred means of financing the physical infrastructure projects sponsored by provincial governments, city governments or other authorities responsible for managing ports or similar facilities. BOT is generally difficult to negotiate; the project would probably cost more and take more time for becoming operational. Possibilities are high that the project services would cost more and the general public will be fleeced through high tariff or toll taxes. In order to avoid unpleasant situations it would be better if the government allocates more local funds for implementation of such projects where normally no foreign currency is involved. Such projects, if at all are to be implemented through BOT, might be restricted to local investors only. The government might consider specific FDI policy for mega projects that require large foreign exchange and for which technical know how is currently not fully available in the country.

SIGNING OF MOUS: One would not be surprised to meet investors who come up with grandiose schemes in industry, transport or infrastructure. They meet the top people in various departments and convince them of the need and justification of their scheme. They succeed in entering into Memorandum Of Understanding (MOU) with the concerned government authority. It is felt that to avoid future disappointment or embarrassment, MOU should be signed only with counter party having good credentials and the initial viability check of the project.

PREFERRED FDI AREAS

SECOND LOOK ON FDI POLICY: Pakistan has been attracting FDI since long and the expatriate investors have been enjoying handsome dividend. Dividends are repatriated and actually are a direct cost to the country. In addition there are indirect costs to the economy in the form of transfer pricing for raw materials, components and services acquired from the parent sources located abroad. It would be advisable at this juncture to take a second look at our FDI policy. Actual cost of FDI and the imports from the parent companies need to be looked into to know real cost of FDI to the nation. Such FDI cost should be compared with the cost of long-term debt. Based on the study, perhaps it may be established that it is worthwhile to go more for loans instead of simple FDI, without transfer of technology. Moreover, it may be advisable to channel foreign investments into sectors, which earn foreign exchange such as export-oriented industries instead of sectors that cater the domestic markets and where earnings are in local currency.

REFORMING MANAGEMENT OF PUBLIC SECTOR: In developing countries the public sector is present in most sectors of the economy. Experience has shown that public sectors have not been managed well and the governments have been forced to inject huge amounts to keep these entities afloat. This caused budgetary deficits. To avoid further deficits, the international financing institutions invariably prescribe privatization of the public sector. In no case attempts are made to reform the public sector units through improved management and governance. The government should now consider reforming the management of public sector units and selectively start spending to gear up the economy. The World Bank, ADB, IFC and IMF, all public sector entities are doing fine because of the good management. Nearer home, Pak Saudi, Pak Kuwait and Pak Libya are also doing well simply because of the good management practices.

ORIGIN OF FDI AND OTHER CHARACTERISTICS: Regional countries have social, cultural and economic relations with Pakistan and these relations can be further strengthened through joint ventures in Pakistan. UAE, Middle Eastern Countries, Far Eastern Countries, China, Russia and the Central Asian States fall in this category. This will be in addition to the relations with our traditional FDI partners such as USA, UK, Japan, and Holland. Ties with these countries should be encouraged for high-tech and capital intensive industries.

Pakistan now has high foreign exchange reserves and the home remittances level has also increased substantially. Accordingly we should adjust our FDI needs and the relationships with that.