Incentivizing local investors

Airbus has decided to discontinue its production of A380 which will perhaps take jobs of over three thousands of workers and technicians. Had Airbus been operating out of Pakistan, there would have been hue and cry on media that the rich company made profits on government subsidy and is now making people unemployed. And seeing this, some officials from any accountability institution, without the knowledge of airline or perhaps any business, would have sent notices to Airbus CEO and board members.
There are reasons for investors to be not keen on having stake in an otherwise full of potential Pakistan economy. Successive governments in Pakistan have tried to give red carpet welcome to foreign investors, but the domestic private sector having loads of cash is wary about starting new manufacturing businesses in the country.
The taxes are too high for domestic businesses to make money without evasion. The FBR harassment discourages SMEs to grow and become formal. The taxman culture is to have higher advance taxes and sit on refunds. Those who have banking credit access can sustain, but for others, cash flow problem is a killer. The foreign investor does not have to worry about these, as implied state protection, does not let corrupt and incompetent government officials to intervene in their domain.
The risk foreigners perceive is based on the problems domestic investors face in the economy, and the foreigners do not enter without compensation of premium for additional risks. The domestic investors do not have luxury of such premiums, but they find out ways by finding loopholes in the system. They do not pay taxes, they form cartels and make abnormal profits to compensate for additional risks. On the flip, those who find such practices immoral or unethical either leave the country or do not engage in business ventures - settling for simple life.
Seeing the foul practices of domestic investors, successive governments have been more tilted towards enticing foreigners in the market. Even within foreign investors, the focus is on having state to state deals for FDI. It is a known fact that there are hidden costs and economic rents in government to government deals, while the private sector ventures are more competitive and operationally efficient. But not many private foreign investors are keen to bet in Pakistan without implicit sovereign cover.
In the previous regime, it was all about CPEC as a number of projects, mainly in power sector, were installed and a few are in the process of development. The details of many are still not public, but the returns are lucrative. The insurance covers are expensive and debt rates are at sweet premium over LIBOR to compensate Chinese investors. On top, Chinese investors do not have to worry about refunds, FBR harassment, and the fear of NAB.
Islamabad is currently fully booked for a large delegation coming with the Saudi Crown Prince. The buzz is that $15-20 billion investment and other deals would be finalized in upcoming trip. Time will tell how much cover the government would provide to Saudi investors eyeing upstream oil and gas businesses.
The government has to strike a balance by giving similar incentives to both foreign and domestic investors, and within foreign investors, there has to be harmony between government-initiated and private-led businesses. Otherwise, it is hard to attract market based or efficiency seeking investment.
The mantra in Pakistan is that foreign investment can only take economy on track to regional growth. The mentality has to change. The efficient foreign investment only comes when the domestic entrepreneurs have confidence in the economic and business policies environment.
PM Imran has repeatedly maintained that the socialist drive of the 1970s still has impressions on society which resents wealth creation and the rhetoric is that virtually every rich man has grown on snatching consumer surplus. Had we let the 22 families in 60s to spur, despite the inequalities at that time, there would have been an array of billionaires in the country.
Today, one can count on fingers the documented rich in the country, and biggest of two documented business champions are under accountability scrutiny. This gives message to anyone attaining size to siphon his assets from the country by investing incremental earnings abroad. The governments, current and previous (Miftah-Abbasi duo) have tried their best by giving amnesty scheme and other incentives for people to bring back the money.
The government wants to have the cake and eat it too. That is not possible, the aim should be to expand the pie by having private lead growth model with focus on domestic investors. Encourage local businesses to do ventures with foreign partners with government just being the facilitator.