The platform for industrial and trade collaboration among less developed and more developed Islamic countries

By Muhammad Bashir Chaudhry
Dec 23 - 29, 2002

The Minister for Industries and Production presided over a meeting at the Board of Investment at Islamabad on 28th November 2002. After the meeting it was reportedly said that the Prime Minister, under his chairmanship, has constituted a 25-member special committee to improve investment climate in the country and suggest prompt measures to restore the investors' confidence. The Minister for Industries and Production will be the vice chairman. The committee will comprise four provincial governors and ministers for commerce, finance, petroleum, water and power, information technology, privatization commission, besides Chairman BOI and the President FPCCI. Some leading industrialists and private sector professionals would also be part of the special investment committee.

This article aims at assisting the committee by offering a number of relevant suggestions.

Main reasons why investors are shy?

Prudence demands finding out real reasons as to why local and foreign investors are reluctant to make further long-term investment in Pakistan. Realistic analysis of the factors will provide basis for changes in policies and procedures governing investment. A review of the press reports reveals that the following are some of such factors:

*Rich Pakistanis living in USA, UK, Middle East, etc. are desirous of making investment in industries or businesses in the country. Many of them have made substantial investment in the country. However, some of them had to suffer delays or other problems purportedly due to non-transparent or inconsistent policies. These expatriates and their associates might also have withheld further investment due to real or perceived discrimination by the government functionaries in dealing with foreign investors and the Pakistani expatriates. Things have improved at BOI but problems remain when it comes to plant implementation and operation.

*Policies have been changed often with the change of government. Same governments have also changed policies to the disadvantage of some of the investors. This makes investment planning difficult, adds uncertainty and enhances risk. In today's competitive world, investors hate to see sudden changes in policies. Foreign investors are inhibited if they perceive that government authorities are unreasonably delaying things or are delaying matters for insignificant reasons.

*Investors are seriously perturbed from poor law and order situation due to which plant operations are disturbed or halted. Their priority is the safety of their lives and that of the lives of the workers 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, they would relocate to other countries. Any single such untoward incidence shall be widely reported and thus may hinder future investment for a number of years to come. As reported in the press, a recent delegation from Japan was of the view that the government has to go beyond coining the slogan 'Love Pakistan' by en{uring security and safety to foreign investors.

*A number of industries owned by local investors or Pakistani expatriates suffered due to untimely withdrawal of tariff protection or other policy changes, which adversely altered the very grounds of financial viability of the projects. Presently, the general impression is that the government does not care much for protecting the interest of Pakistanis investors. There is urgent need to remove any such impression.

*Many foreign investors judge the investment climate in a country by looking at the investment being by the local investors. Being sons of the soil local investors 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 the press to take up their cause should the government of the day decide on actions that are not in the investors' best interest. Hardships of this type may be removed on priority basis. Recently a visiting Japanese delegation of business said that they would like Pakistanis to invest in their own country before seeking foreign investment.

*The investors in Pakistan are obliged to deal with about thirty agencies at different stages of project implementation and operation. This process claims a lot of time of the top executives, in addition to the associated expenses. Each agency has big nuisance value and the industry has to bear with them. Different business associations including the FPCCI have raised the issue with successive governments but the situation is almost the same. Plant operations should never be under threat of closure on flimsy grounds.

* Physical infrastructure is mostly poor and not very reliable. On top of that the rates of utilities are abnormally high. This adversely affects the competitive position for exports and often disturbs the delivery schedule. As a result, the company fails to achieve optimum production or profitability. Improvement in infrastructure and rationalization of utility rates must be tackled on priority basis.


The committee may consider the following main remedial measures to enable the existing industries and businesses prosper in the competitive world, attract fresh investment in infrastructure / industry, provide jobs and reduce poverty:

*Private local investors are the prime movers for any investment and economic activity. Private sector, on the basis of their performance in areas such as profitability, dividends or export proceeds, may be accorded due recognition and respect in the government circles. They can assist the government in formulating better policies and also in their execution. Mutual trust needs to be established on strong footings at the earliest.

*The Prime Minister, in his first meeting with the top bureaucracy on 26th November 2002, urged them to do away with red tape and to serve the people efficiently and honestly. Red tape, covering a wide range of delays in the disposal of public complaints or implementation of pro-people projects, is the mother of all sorts of administrative evils, including the menacing spread of corruption and nepotism. The menace of red tape can be better overcome through a combination of measures including security of service, pay package, accountability, discretionary powers, etc. of the government officials together with the love for the country and its people. The administrative reforms initiated by the previous government must be continued. The task is colossal and calls for the willing co-operation of the bureaucrats to ensure quicker and increasingly satisfying results.

*Foreign countries and institutions are also on the look out for investment abroad. However, for them the profit is not the main or the only motive. Their investment in a particular country sends positive signals to the individual investors. Saudi Arabia, China, Kuwait, Oman, IFC, ADB, IDB and similar other countries and institutions have invested in Pakistan in one-way or the other. Close liaison may be maintained at the highest level with these investors. They may also be associated in the privatisation deals offered by Pakistan to the private investors.

*Privatization 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 or foreign entrepreneurs with modest means. Privatisation policy might be suitably modified to accommodate such investors.

*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. In order to convince the investment community as to the sincerity of its intentions, the government might take further substantial practical steps in all these areas.

*In spite of the past attempts for rehabilitation, the sick industrial units are still there in large numbers. The fact that matters pertaining to these units are in limbo, may possibly act as damper for large-scale new investment. Some of the sponsors of these sick units may also own other unit that are profitable and are not in default to any institution. However, if the group is classified as defaulter, the credit lines to those profitable/ non-defaulter units will also be cut off. If the situation is not corrected in time the other profitable units might possibility suffer losses and become defaulter. These aspects deserve careful review by the committee.

*Industries in the past became sick due to a number of different reasons. Changes in government policies may possibly be the major reasons for sickness of some of the units. Some of the industries located particularly in Gadoon Amazai Industrial Estate may fall in this category. It may be fair that individual cases are looked into and the government provides some relief to such sick industries and their sponsors. This step is expected to send a positive signal to all investors as to the genuine desire of the government in their welfare and for further industrialization on fair basis.

*The government may review and improve the charter of various regulatory authorities such as NEPRA, OGRA, etc. set up in the country. These authorities play an important role in building investors' confidence. These authorities might be considered for more independence and made financially self-sustaining.

*The decisions of the FTO, reported in the press, show some of the cases of mal-administration by the revenue officers. The revenue officers, at least some of them, being over-zealous to meet the CBR targets, squeeze more taxes from the industry or businesses. Such squeeze sends negative signals to the investors particularly the foreigners as well as the Pakistani Expatriates. The matters are being speedily resolved through the FTO for better with the full support of the CBR to him. Much more needs to be done to allay the apprehensions in the minds of the prospective investors. Only recently the FTO has asked the CBR to formulate standards of wastage of various types of industries aimed at keeping the quality of products intact. Such remedial actions are expected to attract investors to Pakistan. Also, the government may consider appointing Ombudsmen in other areas such as Banks / DFIs to resolve concerns of the investors and depositors.

*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 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.

*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. To avoid future disappointment or embarrassment, MOU should be signed only with counter- parties having good credentials and after the initial viability check of the proposed project.

*The government also augments resource availability through foreign loans and foreign direct investment (FDI). Pakistan has been attracting FDI since long and the expatriate investors have been enjoying handsome dividend that are repatriated, a direct cost to the country. In addition there might be indirect costs 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. Moreover, it may be advisable to channel foreign investments into sectors, which earn foreign exchange such as export-oriented industries.

*Experience has shown that most of the public sector units have not been managed well and the governments have been forced to inject huge amounts to keep them afloat. This caused budgetary deficits to avoid which, the international financing institutions invariably prescribe privatization of the public sector. In few cases attempts were made to reform the public sector units through improved governance. The government should now consider reforming the management of public sector units and selectively start spending to revamp the public sector units. It may be noted that the institutions such as 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. PTCL, OGDCL and Pak Libya are also doing well simply because of the good management practices.

*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 Counties, China, Russia and the Central Asian States fall in this category. This will be in addition to the relations with the traditional investment partners such as USA, UK, Japan, and Holland. Ties with these countries should be encouraged for high-tech and capital intensive industries. Geo-political situation is developing such that capital flows might change direction. Pakistan may attempt to attract some of such capital for developing infrastructure and industrial base.

*The EPB has reportedly recommended to the government that the local machinery manufacturers should be allowed to import their requirements of machines, equipment, components and raw materials from worldwide sources at comparatively low rates of duty, so that they may compete in the world market successfully. The government may allow such imports to enable the local capital goods industry to meet increasing demand for machinery in the industrial sector.