Casualties of concessionism

LAHORE: Investors are attracted to commercially profitable and politically stable environments. In the absence of regime credibility, the foreign investors implicitly discount the value through government incentives because they doubt their fiscal sustainability.

Unfortunately, we have still not come out of the incentive mode to attract foreign investment. This is despite the fact that our past experience of providing fiscal (tax) incentives has never paid off. The PTA (terephthalic acid) plant for instance was established by a multi-national enterprise that kept the rates of man-made fiber (basic raw material for blended yarn) much above the global rates on duty protection.

After completion of duty protection the company disinvested in the plant. Our textile industry remained out of blended yarn and fabric market that accounts for over 70 percent of global trade. Fiscal incentives have proved counterproductive in Pakistan as investors edge out competition on these incentives. These incentives create exclusive clubs assured of huge profits. Making profits is not a crime but enabling a few through incentives and disabling others by denying them level-playing field definitely is.

If we look at foreign investment and in recent decade on domestic investment as well we will find that almost all major Greenfield projects were established on exclusive incentives provided by the state. Production cost of many local industries increased as the government provided protection (a kind of fiscal incentive) to a foreign manufacturer for producing soda ash in the country.

The IPPs (independent power producers) were offered guaranteed and high rate of return in 1990s and three decades later this practice has become an ingrained norm as far as investment in electricity production is concerned.

It is high time the government ensured enabling business environment in the country instead of continuing with fiscal incentives that are a risky and generally costly means of attracting foreign investment. Our past experience has shown that fiscal incentives are also corruption-prone.

Most of the investors now look for some incentive to establish an industry in the country. Domestic investors have generally been sidelined.

The government planners should lure back the domestic investors besides encouraging foreign direct investment, which Pakistan needs in sectors where the country has competitive advantage in global markets.

If we deeply analyse the situation it would be clear that regulatory procedures investors must follow in establishing and operating new businesses are among the most important barriers to investment in Pakistan.

Such procedures include registering businesses, administering taxes, obtaining investment approvals, business licences, intellectual property, access to land and long-term leases, construction and building permits, customs clearances, and utility hookups.

The flaws in the regulations give rise to corrupt practices raising production costs, discouraging entrepreneurship, creating barriers to market entry and business expansion, and weaken competitive forces.

Instead of streamlining rules and regulations, planners try to lure investors with one-window incentive under which they are assured to be provided with all the regulatory permissions and connections. The concept itself is an official admission that regulatory procedures in Pakistan are not efficient.

The investors think twice before coming to Pakistan because they know they will have to cope would regulations throughout the life of the project and not just at the time of establishment. Even the one-window solution in many cases has turned out to be a multi-window exercise as only the influential in power circles can make the most of it.

The legal and regulatory codes need to be clarified and streamlined by eliminating duplicative and superfluous laws that increase the cost of doing business besides inviting corruption. Private property rights are needed to be accessible to all citizens. These rights should be clearly defined and strongly enforced.

Moreover taxation systems need to be further reformed so that they are easy to comply with and discourage income concealment and encourage profitable economic activity. Labor laws need to be reformed to allow for more flexibility. There is also a strong need for improved corporate governance legislation.

Efforts are needed to reform excessively bureaucratic government agencies and to strengthen their administrative and enforcement capacity so that laws and regulations are administered and enforced efficiently, effectively, and inexpensively.

Lastly the country needs quality, efficient, and cost-effective infrastructure that’s essential for a democratic, market-based system (such as telecommunication and transport systems). This will provide entrepreneurs with the benefit of operating on a level-playing field.