‘Shifting the FDI focus to export oriented sectors’

An interview with the Board of Investment chairman

Haroon Sharif is a distinguished economist whose career took him from private sector to public sector, then to the international development institutions, and now back to government. Roughly two months ago, Mr. Sharif was appointed in Prime Minister Imran Khan’s cabinet as Minister of State, with the specific charge of Chairman, Federal Board of Investment. Previously, he has served as Senior Regional Advisor (South Asia) to the World Bank (2012-2017), Head of Economic Growth Group (2010-12) at the Department for International Development, United Kingdom (DFID-UK), and Senior Regional Advisor to the DFID-UK (2004-2010). Prior to that, Mr. Sharif served as Executive Director at the SECP (2000-2003), Senior EVP at Bankers Equity Limited (1997), and CEO at Inter-Asia Leasing Company (1993-1997). Mr. Sharif has a B.A. in Economics from GC University, Lahore (1985), a Post-graduation degree in International Business from the University of Hawaii (1990) and M.Sc. in Development Economics and International Development from the London School of Economics (2000). He is currently also a Distinguished Visiting Fellow at the National Defence University, Islamabad.

Below are edited excerpts from BR Research’s recent sit-down in Islamabad with Pakistan’s new investment chief:

BR Research: Based on your vast experience in this region, what kind of a role do you think should a federal Investment Promotion Agency (IPA) have, in a developing country like Pakistan?

Haroon Sharif: Investment promotion is actually one angle of attracting investment in any country. The challenge for Pakistan is to increase its very low investment-to-GDP ratio (~15%). If we need to grow to a level where we could meaningfully provide dignified jobs to over a million+ young labour force coming in every year, then we need to increase that ratio by at least another ten percentage points. So that’s the macro-level policy objective from the country’s perspective. The official and legal mandate of the federal BOI is limited to investment promotion, facilitation and protection, setting up of specialized economic zones (SEZs), Industrial Development cooperation linked to CPEC, and to undertake policy reforms and advocacy. And that is what the BOI Act provides.

BRR: It’s still early days, but have you set any strategic direction for the BOI under your watch?

HS: The main goal is that we need to increase the investment-to-GDP ratio from the baseline that we have as of today. How do we achieve that overall goal? We have five objectives to go in that direction.

First, we are very committed on improving the Ease of Doing Business index. Today (November 7), I have notified a Committee on Ease of Doing Business, which will give inputs to the premier himself. When the PM and CMs champion this issue, my coordination will get easier to push several reforms to improve investment climate in the country. Second, I want to work on strengthening the capability of this institution, improving coordination with line ministries at the federal and provincial levels of the government. The objective is to provide one-window operation to both domestic and foreign investors.

My third objective is to influence the policies of economic growth, to make them more investor-friendly, so that they don’t distort market confidence. And finally, I need to set up several strategic partnerships with stakeholders in both public and private sector to complement their strengths and build a network. So that’s the overall focus and direction. BOI is particularly coming up with investment schemes for Pakistani Diaspora abroad.

We also need to redefine “investment”. There is a lot of liquidity in Pakistan. Converting it into capital is also investment. How many investment avenues do you have as a retail investor, other than bank deposits, national savings and mutual funds? This partly explains the low savings rate in the country, which direly needs a competitive savings market that can actually complement the budgetary resources. Why is it that despite owning prime land in Islamabad, the CDA gets most of its funds from the federal budget? There are more examples like this, such as the NHA. Such bodies need to securitize the assets and then do infrastructural development. My estimate is that Pakistan can raise at least $10 billion in debt through capital markets. This issue is out of the BOI’s ambit, but the taxpayers’ money should be spent on health and education as large portion of infrastructure development can easily be undertaken by raising funds from capital markets.

BRR: The Ease of Doing Business is essentially a moving target. What are your thoughts on Pakistan’s progress on this index going forward?

HS: In the recent index, Pakistan has improved 11 points, which is a step in the right direction. But we need to aim much higher and should be in the list of top hundred countries. There is a lot of good work done by institutions like the SECP and FBR, which was not properly unacknowledged by the private sector. The surveys are unable to capture some of the progress made in the easing of rules and procedures.

I am trying to bridge the gap between the private sector and the public sector. There should be no ‘us and them’ here. We have started partnerships with a broad range of business stakeholders. I have now requested five industry leaders to be part of the Steering Committee for Ease of Doing Business, which will be chaired by the Prime Minister.

BRR: Internally, are you having a critical look at the way BOI functions and any improvements required thereof?

HS: With the kind support of international agencies with whom I have had previously worked with, I have conducted two independent, institutional reviews of this organisation to ask the following questions. How ready are we to achieve the objectives I mentioned above? How aligned are we with the way a modern IPA should be? What kind of skill sets do we need? What kind of institutional mechanisms do we need? And what kind of technological base do we need to have to reach out to a large number of prospects?

I have the draft reports with me now. I will discuss the findings with Dr. Ishrat Husain, whom the Prime Minister has designated to lead institutional reforms. He along with the Advisor to PM for Commerce and Investment and myself will agree on the future shape of investment promotion agency in Pakistan and then it will go to Board of Directors of the BOI, which is headed by the Prime Minister. I am not going to ask for extra budget. I need to increase efficiency – and for that, I will rely on technology up gradation and strategic partnerships. Going forward, we will follow a thematic approach, which is cross-cutting as opposed to the regional approach.

BRR: Which sectors are you specifically looking at as priority sectors?

HS: Eventually, we need to redefine our comparative advantage in the region. So far, the economic growth is consumption-led and mainly coming from the domestic market. We need to locate where our comparative advantage is: will we be able to export, let’s say, computers and cars, or do we need to enhance productivity in our agricultural products? We need to be very clear where we are very good at. Sector-wise, our natural advantage is in agro-based value-added products. If we are producing milk but not converting some of it into cheese, then it’s an opportunity lost. We also have advantage in textile garments, information technology, light-engineering goods, and assembly of electronic appliances.

We have a redefined focus now, with top ten priority sectors. Several existing sectors – such as textiles, mining & quarrying, automotive and auto parts manufacturing, financial services, and pharmaceuticals manufacturing are included. But the new priority sectors include agriculture (food and beverage manufacturing), transport, logistics & shipping, retail chains, IT-enabled services, tourism & hospitality, and petrochemicals.

BRR: This sounds great. But recent BOI chiefs also had plans. Will this time be different?

HS: The big difference this time is that the country’s environment is changing, both for strategic and economic reasons. The strategic reasons are global in nature, as big investors with exposure in three big markets – the US, China and the EU – are thinking to diversify their investments to markets in different regions as the economic interactions between those three markets are becoming uncertain. Pakistan is gaining attention now in this region, for big investors already have presence in China and India. Commercially, Pakistan is a big market with connectivity developing in various areas. China has put Pakistan on the investment map – and we are extremely grateful. But we are open to business and investment from other source economies.

The second reason (why this time will be different) is that there is a realization that we need to change incentive structure for local investors by influencing growth policies such that investment flows towards real sectors instead of unproductive sectors. Currently, hitherto-large exporting houses find it more beneficial to cater local demand by building shopping malls than further investing in their exporting capabilities. My priority for real sectors – which is aligned with the economic management team here – lies in boosting exports, enhancing productivity through emerging technologies, creating employment, and eventually improving Pakistan’s competitiveness. We need to remove protection and invest in global and regional value chains.

BRR: But big business, of which there is representation in the cabinet that you are part of, continues to call for Import-Substitution policies. Will that not create more distortions?

HS: The argument for Import-Substitution is old. The world has changed. Pakistan should rather go for Export Promotion. The next century belongs to Asia. If we want to catch up with emerging Asia, we need to learn from their Export-Promotion policies and their managerial practices. The BOI will work to re-direct investments towards productive sectors and we will need policy support of the government. I am not here for this job only, but I am here because the Prime Minister is committed to reforms to achieve those four objectives that I have just talked about.

BRR: Since you’re the investment czar now, you should get this question a lot: what is the deal flow like?

HS: It’s a very interesting phase for me, as I am taking both institutional steps and policy steps. But at the same time, we need to show some transactions. People need to feel confident that this is not a talk shop, that work is getting done. In terms of tangible transactions, we are already in talks with China and my priority is to route their massive interest in Pakistan towards real sectors. Other than China, two GCC countries – the Kingdom of Saudi Arabia and the United Arab Emirates – have shown solid interest through large companies like Aramco in the hydrocarbons industry.

SEZs, which are a smart way for facilitating businesses, can provide the breakthrough. In the next two to three years, I want to see a couple of mega transactions and several small transactions. Roadshows and conferences may make us look good, but nothing sells like a real transaction. Even if we come into the top 100 in the Ease of Doing Business index but there is no new investment to match the progress, then there is obviously something wrong. We need to obviously work on improving the index ranking, simplifying the tax filings, cutting the procedural lags in acquiring property and getting utilities, and helping the provincial IPAs step up their game, so on and so forth.

BRR: Lastly, the next phase of CPEC is said to be ‘Industrial Cooperation’. How prepared is Pakistan for this phase?

HS: Pakistan is a big market, but we still need to develop readiness for this phase of CPEC. We need investment, but what kind of investment? In the follow-up to the PM’s China visit, the BOI will be looking at several questions. Do we want our country to go on a consumption spree again? Or do we want a scenario where the Chinese make goods here but repurchase majority of the output? Or do we want the usage of local labour force and raw materials? And can we take foreign investment to a level where we have problems repatriating profits later on? But the biggest, immediate structural issue is the question of boosting exports, and SEZs can be the key here.

BRR: A criticism against SEZs is that while they help establish a reforms enclave with tremendous ease of doing business inside, they are insulated from the rest of the economy, where local suppliers and materials are based and have to deal with the same old dis-ease of doing business. What is your view on that?

HS: Pakistan needs to go deeper to see which model of SEZ linkages is better. If we source from local markets, linkages will develop. SEZs only provide a comfort zone. We need to decide how to position export processing zones in different SEZs. Instead of getting worried, the private sector will need to take active interest in SEZs and make JVs with foreign partners. Among a fragmented institutional landscape, BOI stands neutral, and that’s why I am trying to build the convening power to bring private and public sectors together.