Soliciting of foreign investment at various occasions has become almost a routine for our government in order to supplement domestic resources to spur growth and generate employment.
In keeping with the tradition, President Pervez Musharraf, while addressing the inaugural ceremony of a Bank Alfalah Branch in the historic Shah Din Manzil at Faisal Chowk, Lahore, last Sunday, again entreated the foreign investors to have a closer look at the country as a destination of their investment in view of the vast opportunities made available to them.
According to the President, the government is offering various incentives to foreign investors and providing all the necessary facilities.
The country has enormous potential for investment in information technology, telecommunication and housing sectors.
The President also drew the attention of the entrepreneurs to Pakistan's key geographical location, asserting that the country would serve as a gateway for trade between the Gulf region and Central Asian states.
In order to persuade the foreign investors, he stressed the point that 700 foreign firms were successfully doing business in Pakistan and earning profit margins ranging between 20 and 60 percent.
We do not know from where the data about profits has come to the President. It may be true for the top 10 or 12 multinational companies enjoying a dominant market share in their area of activity.
The last survey published in 2001 by the Overseas Chamber of Commerce and Industry (having 185 members) does not support the President's assertion. According to OCCI, the profit after tax of its members was Rs 1.8 billion and the return on equity (ROE) came to 6.1%.
There is no doubt about the necessity of foreign investment and the need to make a case for its increased flow, but it seems that repeated efforts of the government have so far failed to yield the desired results.
Average FDI inflows in Pakistan during the last decade were only around $600 million a year, which was far below the potential of the country to absorb foreign capital or the level of inflows in other countries like China and India. Pakistan has not been able to attract enough investment even in the recent past despite substantial gains in macro-economic indicators and a very liberal FDI regulatory framework.
All economic sectors are now open to FDI, foreign equity upto 100 percent is allowed, there is no restriction on bringing, holding and taking out foreign currency and fiscal incentives once provided cannot be altered to the disadvantage of investors.
Why foreign investment is not accelerating at the required rate or as expected, in Pakistan is, however, not hard to understand. Yes, the country has many important positive elements in place to attract FDI, but the negative influences are also equally compelling.
The cost of doing business in Pakistan is still very high. Manufacturing capacity can only be enhanced if the prices of goods produced are competitive enabling a larger market share to be captured. It also needs to be understood that the infrastructure cost in Pakistan is on the high side. Electricity, water and port charges are among the highest in the region.
There is a seven percent pre-tax charge on manufacturers in the shape of workers' participation fund.
This charge (going into federal pool) is not levied on other sectors such as banking and insurance.
In addition, the transportation is costly because of the levy of surcharge on POL products. It is cheaper to send a consignment abroad by air than by road within Pakistan, if volume, not weight, is the determining factor for the freight charges.
Further, the 150 million size of the Pakistani market may look attractive but the investor is not lured by this as he checks on the purchasing power of the people which is very low by any standard.
This restricts the real size of the market place. Bringing efficiency in production is the job of the private sector but the government can and should address the issues which are man-made and are the cause of raising the cost of producing goods and services.
The lack of interest on the part of foreign investors could also in large measure be directly traced to political factors, corruption and governance concerns, absence of an enforceable legal framework and the rule of law and a crumbling infrastructure.
Of late, the biggest and almost insurmountable challenge has emerged in the form of deteriorating law and order situation in the country which, besides endangering physical assets, is a real threat to personal safety of the investors.
The twin menaces of religious extremism and ethnicism have taken their toll. Nobody feels safe in big cities like Karachi despite the presence of armed law enforcers at most of the places.
The writ of the government, as the attacks on important installations and military vehicles at some places show, does not extend to the whole of the country.
The negative perception of the country is only reinforced by the travel advisories issued by the US and European governments from time to time through public announcements.
Recently, the feeling of insecurity seems to have assumed alarming proportions. Foreign investors either avoid visiting Pakistan altogether or if the visit is unavoidable in order to make some important decisions regarding investment or other matters, local managers/partners are called to Dubai or some other foreign city to negotiate and take final decisions.
Such a practice obviously tarnishes our image but foreign investors cannot be entirely blamed for that when our local elite and VIPs move around nervously and with armed guards.
Tight security measures reported to have been adopted by secret and law enforcement agencies for the protection of the President at the bank branch where he made the present plea to the foreign investors must have conveyed a negative signal to the outsiders.
In our view, the government needs to mobilise all the resources at its disposal to improve the law and order situation in the country in general and ensure personal safety of the foreigners in particular in order to induce foreign investors to have a serious look at our country as a desirable destination for investment.
It must be understood that nobody would rush to a country for investment at the risk of his life even if return on investment is more attractive.
Fortunately, some of the investors from Middle Eastern countries now appear to be quite inclined to get a foothold in Pakistan due largely to the problems of investing in Western countries after 9/11, but so far their interest seems to be mainly confined to expanding existing businesses or entering real estate.
The government also needs to attend to their difficulties by taking measures like improving foreclosure laws and ensuring clear titles of the land. Mere publicity, in the absence of concrete action to change the situation on the ground, would, in our view, not make a significant impact on the level of foreign investment.
There can be no better ambassadors to solicit foreign investment into Pakistan than the existing investors.
Top government functionaries' interaction with them has turned into a routine affair with promises repeated and very slow follow-up.
The buck is passed to the Central Board of Revenue or the provincial government responsible for infrastructure and labour issues to remove the irritants.
Federal ministries appear to be quite impotent in addressing the just demands of investors. The UAE investors group led by Sheikh Mubarak Al-Nahayan is an exception. After purchasing Habib Credit and Exchange, now Bank Al-Falah, they went forward and put $100 million in the buy-out of United Bank Limited. They have now boldly entered the cellular field and intend to make Warid Telecom a major player in Pakistan.
The real credit for all this goes to the Pakistani managers working with them for a long period. But let us not be deceived by the hype as investment to generate employment is lagging and the ranks of the unemployed is swelling.
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