‘Bureaucracy, speed money, NGOs hampering FDI’

LAHORE: Foreign direct investment (FDI) is drying in Pakistan due to obsolete investment policy, experts said on Thursday, advising planners to go for third generation investment policy, ensuring transparency, governance, compatibility with international law and access to fair and speedy justice.
“This in plain words means a corruption free regime,” said economist Faisal Qamar.
Investors are shy to come to Pakistan, he said, as most multinationals cannot accommodate a local political leader’s payment demand to settle a labour dispute.
He said developed economies now prosecute their investors operating in other economies for any type of graft given to gain business advantage. “There are very harsh anticorruption laws (for) US and UK companies operating overseas,” he said, adding that these companies now are finding hard to operate in corrupt societies, as the laws enacted by their governments punish them for aiding corruption even in other countries. He said even India and China have enacted harsher anticorruption measures to attract and retain foreign investment.
Whereas in Pakistan, he said bribe takers have invented ways to ‘facilitate’ foreign investors. They, he added are advised to take the route making payment to an NGO run by that leader.
Companies that are unable to pay bribes are accused of tax evasion after routine audit by the tax authorities, an accusation which always proves wrong on a detailed professional audit. To save companies from this distraction, the tax department may advise them to hire a designated financial consultant at a fat fee.
Additionally, Faisal said that the overdue sales tax refunds are routinely held for years by the tax department if ‘speed money’ is not provided. Often the parent company at home is forced to write off the amount that wipes out annual profit, resulting in employees forgoing bonuses. He said refunds are not possible without a payoff.
Faisal explained another mechanism used by the authorities for milking the foreign companies. The bribe takers instead of direct bribe now ask companies to make payments or to give commission to their dealers or agents, demand sponsorship for foreign travel, require charity to NGOs recommended by government officials or politicians. He said timely issuance of a license or permit renewal are also subjected to ‘speed money’. Almost no one will officially admit to paying speed money, but the uncomfortable reality is that there may be no alternative for a business that needs to keep operating.
Economist Asif Ali Shahid said extortion by crooked politicians and bureaucrats cannot be ruled out in Pakistan, who may exhort money by making credible threats against a business or even the lives of its executives. He said these are real threats that are deterring foreign investors. Local investors, he added make the necessary compromises to remain operative.
He said the foreign companies operating in Pakistan use political influence to wriggle out of bureaucratic hurdles. Many lacking this clout however see their cost of doing business rising due to bureaucratic delays. These companies, he added manage head count very tightly and under-invest in staffing compliance functions such as finance, internal audit, and legal. This, he added in not a prudent approach, given the relatively low cost of head count in Pakistan. The finance and administration unit is usually the primary contact with bureaucracy, he added.
It is critical to have a strong team, with managers who understand local laws and regulations, possess the skills to work with government officials, and can get things done without paying bribes, he added.
Shahid said multinationals operating in Pakistan need to be strong in matters of compliance. In societies like Pakistan, bribery and corruption depends largely on the tone from the top, he said. Therefore strong leaders deliver clear policies, proceed with stringent controls, and maintain regular internal audits of high-risk areas.
He said multinationals usually ignore small things like segregating personal phone calls, only charging appropriate business expenses, and avoiding the personal use of company asset. He said cumulative impact of these expenses is substantial. Moreover, he added a sense of entitlement in small things is often a predictor of bigger problems. He said such predatory behaviour is impossible in presence of strong top management.
Success is perfectly possible in emerging markets like Pakistan without making compromises, but there are real consequences and real costs for those who uphold ethical behaviour, especially in the short term, he added.