May 29, 2006	Monday	Jumadi-ul-Awwal 1, 1427

PAKISTANI officials rejoice over the fact that direct foreign investment during the first ten months of this financial year has exceeded $3 billion as they had projected.

The bulk of that investment has come from the neighbouring Gulf States, the UAE and Saudi Arabia in particular and a major part of which has gone into the telecommunication sector. Far more investment is expected in this industry after Warid, a UAE company, has won over four million customers within its first year operations.

All that has encouraged the prime minister to promise an investor-friendly budget next month. And the Board of Investment (BoI) in its budget proposals has called for a reduction in the various corporate taxes and to cut withholding tax to three per cent. The BoI says that a great deal of money gets accumulated with the CBR and getting refunds take a long time, which creates liquidity problems for the companies.

The Securities and Exchange Commission has also come up with a useful guide for investment.

The BoI says that advanced tax should be abolished. It urges that multiplicity of taxes should be avoided and that if all kinds of taxes are taken in to consideration, the total tax rate on companies come to a high 42 per cent.

The board wants the tax and dividend to be reduced from ten to five per cent and the initial depreciation allowance to be raised to 90 per cent for new companies. It wants these proposals to be considered if the grant of tax holiday is not possible.

At a time when Pakistan is seeking more and more foreign investment, foreign missions are coming here seeking Pakistani investment in their countries, particularly in the real estate.

Delegations have been here seeking Pakistani investment in the Dubai real estate, in the new buildings and apartment blocks springing up there. The latest delegation to come is from the UK to sell prime land to Pakistanis who own quite a bit of property there.

And the State Bank of Pakistan has warned investors not to patronise phoney ventures abroad. Earlier, such warnings had been given by Prime Minister Shaukat Aziz.

But foreign companies from Singapore have come here and are developing real estate and offer swanky apartments by the seacoast with Askari Bank funding the buyers. It is getting to be a two-way investment now.

Much of the investment from the Gulf has gone into the telecom sector followed by the power sector (KESC) and Pakistan Steel. The investment in the telecom sector alone has been to the extent $1.7 billion.

We have now to see who gets the PSO, the Pakistan Petroleum, the Sui Northern Gas company and Sui Southern Gas company. If any of them gets sold before the end of this fiscal year, the over all earnings from privatisation will take a big jump.

These are not new employment creating and manufacturing enterprises. But they have certainly added to the employment and productive capacity of the industry.

What matters far more now is how much more they will invest to expand their enterprises, which cry for such expansion. The KESC and the PTCL and other mobile phone companies have indicated they propose to invest large additional sums and the new Saudi owners of Pakistan Steel have said they propose to invest $200 million more in the industry.

In fact, some of those enterprises like the KESC have to make the additional investment very quick and make the investment large enough to render the utility truly useful and satisfy the customers instead of outraging them with frequent load-shedding or breakdowns.

The fact is that the cost of doing business is still very high, not only the foreign investors and Pakistani businessmen say that, but also the World Bank and the Asian Development Bank. Multiplicity of taxes is one of the major problems. Corruption is a very significant deterrent.

Smuggling is another factor, which the manufacturers complain against. The red tape delays are galore and provoke the investors and feeble administration of justice and the failure of the system to execute the decrees passed by the courts is another deterrent.

Law and order continues to be a major problem. The police is often the offender instead of the protector and are often avoided by the victims. Above all that is the gross inadequacy of the infrastructure, specially power and water. The repeated failure of the KESC in recent times and the violence it provokes provides the best or the worst example.

Normally, trade should lead to more foreign investment. How much progress have we made in solving problems of trade with our Muslim neighbours?

After nearly 60 years, Pakistan and Iran have again agreed to remove trade barriers and achieve a $2 billion bilateral trade. This is how slow we have been in solving our trade problems or how problems solved reoccur again.

And for all the big talk about the excellence of Gwadar Port and how it will be made a well-equipped world port, we are now told that Gwadar port lacks modern equipment. It is also seen as a destination for foreign investment.

Because of such inadequacies, the ministries of commerce and textiles have recommended to the budget-makers to treat locally made machinery as exportable goods tax-free. But the government has invariably preferred to refund the duty after much delays rather than make the exports of machinery tax-free.

At the same time, speakers at a seminar in Washington say that Pakistan is now facing major economic risks. The economic policies of the present government make him very nervous, said Shahid Javed Burki, a former finance minister of Pakistan. It was also said that Pakistan had missed many of the opportunities offered by 9/11 while availing of a few of them. This is not the ideal climate for large-scale foreign investment when law and order is a significant deterrent.

With a large trade and balance of payments deficits, workers remittances and rising foreign investment totalling nearly $8-9 billion by the end of the year is financing the annual oil bill estimated at $5.5 billion.

But there is more than money in foreign direct investment; there is some more employment and technology transfer. And we need all of that instead of merely change of ownership of the public sector assets.

Direct foreign investment on new projects is always far better than the investment, which comes through privatisation. But in the kind of circumstances we are, we have to accept the Gulf capital for privatisation as it comes along.