FDI - the bottlenecks

While the MoUs signed during the Prime Minister's latest visit to China remain controversial, his visit to Germany and meeting Chancellor Angela Merkel was significant. Since 1959, Germany has been Pakistan's friend, is now its biggest trading partner in the EU, and also the country that assisted it immensely in getting the GSP Plus status from the EU.
Germany - biggest and by far the most developed European economy despite the fate it suffered during WW II - can help revamp Pakistan's inefficiency-riddled energy sector. KfW - Germany's state-owned development bank - is already involved in projects in Pakistan, including hydro power projects, and has a clear perception of the needs of Pakistan's energy sector.
During negotiations with Pakistan's Prime Minister, Chancellor Angela Merkel pointed to Pakistan's security situation as a deterrent to German investment. "We can look at intensifying these [investment efforts], as long as conditions are right ... It is important that the prime minister succeeds in improving the security situation and the legal system so that investors feel safe."
Despite the German Chancellor's hints, Pakistani Prime Minister's claim that "Pakistan offers the most investor-friendly climate compared to the world..." sounded odd, because he admitted that the country was paying a "forbiddingly heavy price" for fighting the menace of terrorism, and inadequate investment in its energy sector was discouraging FDI inflows.
As for Pakistan's legal system, its bias was exposed by Islamabad's Anti-Terrorists Court declaring the top brass of the PTI and PAT as "proclaimed offenders", and issuing non-bailable warrants for arrest of these parties' leaders for committing acts of "terrorism", while committers of the June 17 massacre in Model Town Lahore, have yet to be indicted for terrorism.
While the menace of terrorism impacts all countries with varying degrees, in Pakistan's context, besides the power shortages what damaged investor confidence were the flaws in the regulatory and legal systems that weren't addressed as thoroughly as they deserve, though successive regimes claimed that they were striving for a sustained rise in investment to contain the slide in GDP growth.
The oft-promised "one window" - supposed to tackle all issues relating to investment even in the Special Economic Zones (SEZ) - remains a myth. So does the development of SEZs along lines that (besides the tax concessions promised to the investors) assure sustained availability of all essential services, security, and round-the-year connectivity to air and sea ports.
Investors demand these services on a guaranteed basis (at least in the medium term) to touch activity levels that permit availing the benefit of operating at break-even levels of production, and becoming truly competitive thereafter. There is precious little to suggest that providing this set-up was the government's priority; the focus was on developing Metro Bus networks.
By investing in the industrial sectors of developing countries, foreign investors look to cost cutting - primarily in labour cost, but in other service costs as well. These advantages assure competitiveness, which was the key factor prompting US and European industrial giants to shift their production facilities to China and other East Asian and South American countries.
The other key consideration of the investors is stability in tax regulations to assure stable net returns on equity. No feasibility sounds credible to the investors unless reasonable stability in the taxes structure is guaranteed. Assuring this requires co-ordinated policy-making by the ministries of commerce, trade, and finance, and consultation with the investor community.
In all post-federal budget debates, chambers of commerce and trade associations fault the changes in the taxation structure manifesting the absence of this co-ordination and the budget-makers fail to convince businesses about the benefits offered to them in exchange for higher taxes. Reason: government's continued failure to fulfil all such promises.
While Pakistan does offer a key advantage (low labour cost), uncertainties over energy and power supply due to ever-increasing reliance on imports and constantly changing tariffs of these key inputs discourage investment not just by foreigners but by Pakistanis as well. This is not a fresh discovery; it is the ever-present reality that even the blind can sense, if not see.
History proves that the most dangerous blind lot is the one that claims having 20/20 vision yet can't see even starkly visible realities. Pakistan's ever-higher reliance for power generation on the private sector instead of continuing with building more dams like Tarbela and Mangla (Kala Bagh dam being a victim of blind politicking) reflects the visionary capacities of its politicians.
The ambitious power sector projects being contemplated by the present regime will take long to materialise. The challenge in the interim period is to keep the wheels of the economy rolling, and the only option Pakistan has is to cut the line losses and power theft on the one hand, and increase the efficiency of the existing power generation base on the other.
The German government's offer to establish an Energy Forum in Lahore is a positive step and, hopefully, besides proposing and investing in wind and solar energy, the top priority of this forum would be not only to guide this effort but provide technological support for drastically cutting the distribution and line losses, and unchecked power theft.
Besides power sector's woes, regulatory frameworks are either absent, inadequate, or outdated, given the size of the economy, emergence of new sectors, and changed businesses mechanisms and practices. While bank regulation kept pace with change, support services for the financial sector - asset valuation, goods transportation and custodial services, and loss surveyors - remained unregulated.
In the regulated sectors too, problems keep arising, firstly, because of outdated regulations that obstruct economic activity, and secondly, because dispensation of justice remains controversial. Cleverly-crafted petitions often serve to convince the judiciary to issue stay orders that stall economic activity for extended periods and cause huge losses to the affected investors.
No less controversial is the way the heads of regulatory agencies are appointed. Before the 2013 elections, the PML-N had filed a petition in the Supreme Court (SC) whereby these offices were to be headed by individuals selected on the recommendations of commissions consisting of experts, not the President's office. A June 2013 verdict of the SC validated this PML-N demand.
Oddly, after assuming power, the PML-N sought reversal of this verdict, and a November 14 SC verdict says that seeking recommendations of such commissions is in conflict with Article 90 of the constitution. It is the exclusive right of the federal government to appoint the heads of statutory, autonomous, semi-autonomous and regulatory authorities under the terms of the relevant acts and ordinances. How foreign investors perceive this change, remains to be seen. For a cronyism-ridden Pakistan, it could prove harmful.