Spurring investment

LAHORE: Industrialisation would accelerate if our planners made even half as much effort on local investors as they did for attracting foreign investors to the country.

The protection and incentives provided to foreign investors are very high, including the sovereign guarantees given in power projects. Power projects are mostly joint ventures, and Pakistani investors have larger stake within the ventures.

However, it is only the foreign partner that can go for arbitration in case of dispute with the government on payments. Local investors operating with 100 percent equity on same conditions cannot go to the agreed foreign arbitrator.

There are many hindrances when it comes to the dispute resolution mechanisms for domestic investors. They have to face tax officials, Federal Investigation Agency, National Accountability Bureau and other organisations and institutes on flimsy grounds. Foreign investors on the other hand do not face similar obstacles.

Pakistani investors should be allowed to operate transparently with no fear from the rulers if they do not see eye to eye with them. There have been numerous accounts of political victimisation across governments in Pakistan, and various businesspersons have accused institutes of harassment.

However, if the government now is serious about spurring investment in the country, things should be changed drastically. Interference from concerned circles needs to stop in matters of business and investment.

Another point worth reconsidering is the aspect of sovereign guarantees given to the foreign investors, which allows them to remain outside the income tax regime for the life of their projects (ranging from 15-27 years).

It allows investors to mint money, and though the government retains the right to charge wealth tax, it often refrains from doing so for the fear of hurting investors’ confidence.

In case of the local investors however the state adopts a different route.

The state does not tinker in the policies agreed with the foreign investors, but it almost always fails to implement its own long-term policies that it announced after consultations with domestic stakeholders.

This erodes confidence in the government policies and promises. For instance none of the policies announced for the textile sector were implemented in full. Same is the case with the auto policy, which was changed at the will of the planners.

Government planners should lure back domestic investors, and encourage foreign direct investment at the same time. Pakistan needs FDI in sectors where the country has competitive advantage in global markets.

Government must ensure an enabling business environment in the country instead of continuing with fiscal incentives that are a risky and generally costly means of attracting foreign investment.

Fiscal incentives have proved counterproductive in Pakistan as investors’ edge out competition on these incentives.

For instance a PTA plant established by a multinational enterprise kept the rates of man-made fibre much above the global rates on duty protection. Today, Pakistan is almost out of the blended textile market that accounts for 70 percent of global textile trade.

Investors whether local or foreign are attracted to commercially profitable and politically stable environments. Moreover, in the absence of regime credibility, the foreign investors implicitly discount the value of these incentives because they doubt their fiscal sustainability. Fiscal incentives are also corruption-prone.

Regulatory procedures that 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 licenses, intellectual property, access to land and long-term leases, construction and building permits, customs clearances, and utility hook-ups.

The flaws in the regulations raise production costs; reduce entrepreneurship, market entry and business expansion; and weaken competitive forces. Promise of one window solutions to all regulatory procedures for foreign investors or in some industrial zones is itself an admission of the non-transparent way our institutions operate.

Specific investment based incentives would not resolve our problem. The procedures should be fast and transparent for every investor to ensure large scale economic activity.

There is a dire need to eliminate duplicative, superfluous laws that increase the cost of doing business and invite corruption. Private property rights are needed to be accessible to all citizens clearly defined and strongly enforced.