In a recent foreign investment (promotion and protection) bill, which is being passed by the National Assembly, the apparent objective is to attract foreign investment. However, the protection given to the investors is a little too much and controversial. There is too much impunity and protection being given to any ‘qualified investment’ with no bar of a minimum $500 million investment.
Inconsistent policies and skewed incentives have remained the key factors in discouraging investment in the formal manufacturing sector. That is true for both local and foreign investment. For foreign investment, the biggest impediment is friction in capital account mobility i.e., ease of bringing in and out the money. Today, that is the thorniest issue for all the foreign investors in Pakistan. Yet, the bill is silent about it.
Having said that, the undue or unnecessary involvement of courts in certain cases has damaged foreign investors’ confidence in Pakistan. And in some cases, the country had to pay penalties in international arbitration. The Reko Diq fiasco is a top example. Then there was a case of a rental power plant from Turkey. And one classic example is not allowing the privatization of Steel Mill by the Supreme Court.
There are other cases where the investor came to Pakistan and certain commitments were made on taxation and other incentives for a certain periods. But later due to lobbying of some domestic players, those were reversed. One example is Lotte Chemicals where eventually the lobbying of Ibrahim Fibers prevailed, and the foreign investor was stunned.
The case of how telecom deregulation unfolded over the years is another example. There has been an immense benefit to the government in the form of employment generation, taxation collection, spectrum auctions, and license fees in the last two decades. There are also many benefits for the consumers in terms of access to information- low-cost calls and data usage. But what gains do the telecom companies get? One foreign company bought shares in a telco at $758 million in 2007 and sold it at less than one-third of the price in 2013. There are other examples of banking investments where foreign banks exited by booking a big loss in dollar terms. Then the only private company in the power transmission and distribution business hasn’t been able to draw a dollar in dividends in fifteen years.
And all those companies that are operating in Pakistan irrespective of origin (be it American, Chinese, or any other) are complaining about their profit repatriation in the form of dividends, which is being stuck due to the dollar shortage in the country. The sum is around $600-700 million and counting.
How much of these apprehensions are being dealt in the new bill. Apart from the protection of policies-continuity, there is not much. And here the policy is a little too skewed towards foreign investor and federal government discretion. The question is how to protect consumers and taxpayers’ interest. For example, the rental power deal was controversial from day one. And there are other examples in the mining and power sector where there were serious reservations on deals.
The need is to have the right policy framework and competitive bidding in the start to not let any one side have an undue advantage. Once that is done, it should be protected from political interventions by the future governments. Investors of the 1994 power policy still remember how they were harassed by Nawaz boys in 1998. This must end. But there were serious questions about the skewed investment incentives in the 94 Power Policy. Both acts are condemnable and should be avoided by having the right and transparent process.
However, what is being offered in the bill is creating new controversy. The Bill overrides all existing laws in Pakistan. The ‘qualified investment’ is exempt from all kinds of taxes and duties – be they provincial or federal. That includes no capital control restrictions by SBP. However, in the absence of dollars (as in the case today), capital controls are inevitable.
Anyhow, having such a bill is the need of the hour. It must be well thought out, debated, and balanced. It’s good to work on enabling the environment to attract investment. However, it must promote a sustainable macroeconomic situation and a vibrant economy to retain investors once they come into the country.
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