FDI policy has to be revisited through human capital lens: Nadeem Elahi, President, American Business Council of Pakistan

Nadeem Elahi is the President of American Business Council of Pakistan, which is one of the largest investors group in Pakistan - currently boasting about 66 members, most of which are Fortune 500 companies operating in various sectors ranging from healthcare, financial services, to information technology, chemicals & fertilizers, energy, FMCG, food & beverage, oil & gas and others.

When he is not busy with the ABC, Nadeem works as the Managing Director & Country Head for The Resource Group (TRG). As one of the co-founders of TRG and prior to moving to Pakistan, he served as TRG's head of North American Operations, based in Washington, D.C. Prior to that, he has had extensive background in operations, general management and business development.
In this interview, Nadeem talks broadly about trends in foreign direct investments and business climate in Pakistan. Below are edited transcripts.

<B>BR Research: Why is that FDI inflows have been gradually falling since the last few years?</B>

<B>Nadeem Elahi:</B> If you have to look at some of the sectors in which US companies have been active in Pakistan in the last decade, you will realise that the decline is partly because of what is happening in Pakistan and partly globally.

In certain sectors you see a shift which is not specific to Pakistan; they have sort of shrunk globally; for instance banking and financial services. Ten years ago, Citibank had a visible presence in Pakistan; now it doesn't. In certain sectors you see a shift which is not specific to Pakistan; Barclays exited; Bank of America had exited a long time ago. So the presence of foreign banks has shrunk dramatically.

Similarly, decline in global oil prices has led to slowdown in FDI investment in energy exploration around the world; and what that does that companies pull out of high risk areas more immediately than from other countries.

However at the same time certain sectors have picked up in the last ten years; two of those sectors that have specifically seen some growth are FMCG and IT. And within IT we are talking about large data equipment companies like Cisco, Del, Microsoft - their numbers have seen a significant amount of growth. Though of course, the FDI in IT is mostly in terms of people, which is why that number isn't that big.

Coming back to the subject, the other reason why FDI is falling from the US is because of Pakistan specific factors.

For instance, the pharma sector, which has been a big component of the FDI for the last two decades, has been hit by the price-freeze. Plus, after devolution, pharma regulation has gone to the provinces; they have no capacity to regulate, which puts this industry into real trouble.

One example is Johnson and Johnson that recently wrapped up. They made these surgical goods, called switchers, used to soak blood from the wound when doctors are operating. They were the only plant in Pakistan and because of the price control and regulation, nobody makes that in Pakistan anymore and the country has to import it. Only now somebody is thinking to set up operations for that locally.

<B>BRR: But do you see some winds of change ahead?</B>

<B>NE:</B> Well the dynamics are in fact changing and the new age industries can be expected to come in. Google and Facebook are very active and very interested in coming to Pakistan because this is a big internet market and a high growth market. Their investment will be in people as against plants but that is also needed. However, these players are currently facing regulatory concerns.

The new age industries could change the scenario. But the overall trend is downward because of a host of reasons. For instance, even in sectors such as FMCG that is witnessing some growth in investment, there are serious tax issues since the government has been implementing ad-hoc tax measures for the last one and half years, which is scaring away investors. Because of this, when foreign investors report back to their head office they don't have a positive story to tell.

Then there is the China factor. The CPEC has brought along a whole ecosystem along with it. And they have gobbled the market up; since quite often they deal directly with the government and dump their goods at throw-away prices.

<B>BRR: We will touch on China factor in a bit, but for now let's talk about taxes. Ad-hocism and inconsistency of tax policy has marked Pakistani economy for many years, then how is it that only now it is affecting FDI inflows from the US.</B>

<B>NE:</B> You are right. But the other issue is the aggression with which the tax authorities are going after the registered tax payers. They have targets to meet since the government has committed to the IMF. And since the tax base is not growing so what do they do, they start harassing the people.

<B.BRR: Harassment of tax payers is a recurring complaint by SME players; but can FBR really harass the likes of Coca Cola or other MNCs considering that MNCs have so much clout and resources?</B>

<B>NE:</B> I will give you an example without naming the company. Just a few weeks ago, the FBR sends a notice to a bank, saying that a certain XYZ company has certain amount of dues so you should freeze this company's accounts. And the dues by the way are inflated arbitrary numbers just to squeeze most amounts of concessions from the company. Those kinds of things have happened to several companies.

As a result of this harassment, companies are not keeping any funds here anymore, even their working capital needs, they are using local banks to fund that. And so as soon as they earn some money they payout dividends to their mother firms outside Pakistan; the whole strategy is they will bring the money back when we need it.

So just the fact that these firms are big enough to hire big tax lawyers doesn't mean that their day to day operations are not affected by arm-twisting tactics by the tax department; these issues raise alarm bells in regional head offices. But we have raised these with the government at very serious levels with the finance ministry and other stakeholders.

<B>BRR: There are a host of economic sectors that might see a trigger due to CPEC? Do you think the US firms could have some role or interest in that?</B>

<B>NE:</B> There are certain areas in which the US firms have a competitive advantage. Last month there was a delegation from the US-Pakistan business council which is the subsidiary of the US Chamber of Commerce. You have very senior people in that, representing very large firms including a few logistics companies.

These logistics companies were active in the Nato era, which was a huge exercise, and they were complaining with the Finance Minister that they were being left out of the CPEC.

The economics of CPEC is such that the Chinese are coming in, the commercial loans are being given to build an ecosystem around it; they bring their own transport, logistics etc. These American firms were saying that we understand you cannot make us a part of exclusive CPEC projects but you should at least let us get into projects that are in the periphery of CPEC.

<B>BRR: Can you dwell a little more on the periphery areas?</B>

<B>NE:</B> It's understandable that China or any other country that makes investments of this size will bring in her own ecosystem. So we understand that the government has a bilateral agreement on the core areas of the CPEC, but as far as the periphery areas - such as IT systems or infrastructure - if those RFPs and processes can be made more transparent and open to American and other companies to compete, then it would be great for the country because that helps diversify FDI flows. And that's a formal request that we have made to the government.

<B>BRR: You mentioned earlier, about investing in people; could you shed more light on that?</B>

<B>NE:</B> We keep talking about the demographic dividend. But you only have 25-year window to educate them or train them. If you don't do that, it's going to be a demographic liability. Which is why bringing companies that are operating in the new age sectors - such as IT services - and having these companies set up back offices and training centres is very important.

Because if we don't do it in the next ten years then I think we are done. So it is in this sense that we need to rethink about the lens with which we see investments; it's not just financial or technological capital, but it has to be human capital too.

If you look at the Indian experience with back office industry boom, it all started with British airways back in the 80s. It was the first company to set up back office in India, and then followed Citibank, and then 5-10 years later, the Indian companies expanded abroad.