October 16, 2002	Wednesday	Sha’aban 9, 1423

ISLAMABAD, Oct 15: The World Bank has identified inadequate incentive regime, risky and weak regulatory framework and weak financial institutions as the reasons for government’s failure to improve investment climate in Pakistan.

In a report the world bank said: “It is the government failure to maintain a favourable investment climate in the country that has constrained the growth of a dynamic, competitive and sustainable private sector in the 1990s.”

The report was submitted to the economic affairs division and the commerce ministry early this month, a senior government official told Dawn.

Pakistan’s potential to attract foreign direct investment (FDI) has although improved marginally from 141 points in 1990 to 159 points in 2000 yet its relative performance to secure FDI has reduced significantly from 6 points to 2 points.

The Bank specifically mentioned four key areas of concern, which, it said, should be addressed to turn around the declining trend of investment and exports.

Firstly, an inadequate incentive regime from a combination of unfinished trade policy reforms, continuing reliance on sectoral industrial policies, an unfriendly investment regime, poor tax administration, excessive regulatory burden and a recurring pattern of policy instability.

Secondly, risky and weak regulatory framework in infrastructure particularly in the key growth supporting sectors of gas, mining, power and telecommunications.

Thirdly, weak financial policies and institutions that discourage availability of financing for private investment and finally the risky macroeconomic environment.

The bank noted: “While the vision for private sector-led development is well-articulated, the country is still in the process of formulating a strategy to realize the vision. Signs that some of the key investment climate issues are beginning to be tackled are apparent.”

The report said that infrastructure services also suffer from a weak regulatory framework that hurts the investment climate by inhibiting private investment in infrastructure, undermines the competitiveness of the economy and exacerbates macroeconomic vulnerabilities.

Since the mid-1990s, the government has pursued policies aimed at attracting private sector investment in infrastructure. However, progress has been impeded by the risks stemming from a weak and unstable regulatory framework for the efficient provision of infrastructure services.

The bank said that despite a number of regulatory decisions in the power sector, implementation issues remain. Tariff standards and rules are vague and clear policy guidelines from the government of future competitive market structure are lacking.

The “private investors are unlikely to respond (to power sector privatization) unless further progress is made on creating an enabling regulatory environment in the sector by strengthening the independence of regulatory agency (Nepra), reducing regulatory risks by moving towards formula-based and multi-year tariff setting mechanism and establishing a legal framework for safeguarding foreign investments,” the bank warned.

The bank said that despite new capacity additions in the power sector following investments of mid-90s, reliability and efficiency in the system remain poor, the sector’s financial position has deteriorated and only a little more than half the population (about 55 per cent) has access to electricity.

FDI in Pakistan reduced from $530 million in 1999 to $305 million in 2000 and improved to $385 million in 2001. As percentage of gross capital formation, the $530 million FDI was 6.7 per cent which has reduced to 3.9 per cent in 2000.

Pakistan’s foreign direct investment (FDI) total stocks since 1980 till now stood at $6.896 billion in 2000 but reduced to $6.698 billion in 2001.