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On foreign investments and an uncertain 2018

Updated March 19, 2018

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The money being poured in the power and transport infrastructure under the multi-billion-dollar China Pakistan Economic Corridor (CPEC) initiative will improve Pakistan’s competitiveness internationally and link it with more countries than it is doing business with at present. That will create a huge space for foreign direct investment in the country’s export industries.

“To encourage exports you have to be competitive internationally. Many factors play a role. The government is working a lot on that. (Energy and transport projects under) CPEC will make Pakistan’s exports more competitive.

“Investments in special economic zones, railway, roads and ports will significantly cut export costs,” Mr Bruno Olierhoek, the president of the Overseas Investors Chamber of Commerce and Industry (OICCI) that represents nearly 200 foreign companies operating in Pakistan, noted in an interview with Dawn.

He was asked to comment on why foreign investors operating in Pakistan were focused on the domestic market alone and reluctant to invest in export industries.

“CPEC is a loan and Pakistan is using it for infrastructure and its energy issues. This is something that is (also) misunderstood abroad, that China is somehow giving money to Pakistan. It isn’t the case”, says Bruno Olierhoek

“Availability of energy and infrastructure upgrade will make it viable for others (foreign investors) to invest in new export opportunities. It will help create more export-oriented companies — also (to export goods) to china.

“Empty containers returning to China don’t make sense. The whole objective of CPEC is to not just create a road from China, but to improve competitiveness of the country and connect it with more countries than it is doing business with today. It is because of this possibility that CPEC is a game changer.”

But Mr Olierhoek cautioned that availability of energy and infrastructure upgrade wouldn’t automatically attract foreign private investment. “CPEC is good news (for Pakistan) but the government should also work hard on dismantling other barriers keeping foreign investors at bay.

“For example, perception on Pakistan tends to be more negative than the reality on ground. People overseas are still scared because of the perceived law and order situation although it is a different story once they are in the country.”

He conceded that foreign investors in the past have remained more market-centric because of energy and infrastructure bottlenecks and a “young, dynamic and big domestic. So domestic market has a lot of opportunities and a lot of investment is going there.”

He didn’t agree that foreign investors were waiting for China to take care of Pakistan’s energy and infrastructure shortages before they invested in the export industries.

“CPEC creates opportunity for everyone and it is a misperception that it is only for China. But still it is early days. Investment (in power and transport schemes) is done mostly by Chinese companies but like I said when you have infrastructure in place it opens opportunities for other investors as well.”

CPEC is not a giveaway from China, Mr Olierhoek said. “It is a loan to Pakistan and Pakistan is using it to increase its infrastructure and address its energy issues. This is something that is (also) misunderstood abroad that China is somehow giving money to Pakistan. It isn’t the case.

“Of course Chinese are negotiating good deals for their companies. So Pakistan should make sure these investments are used in its best interest.”

Foreign direct investment: Mr Olierhoek sought to dispel the impression that foreign firms operating in Pakistan aren’t investing in new Greenfield projects and pointed out that OICCI members had reinvested $2.2 billion from their profits in 2016, which was roughly the same as $2.6bn received by the country as FDI (including Chinese investment on CPEC related projects).

“The foreign companies already operating in Pakistan have positive sentiment and are investing here for the future. The size of reinvestment shows that we believe in Pakistan.

“Of course part of our reinvestment is for maintenance and small upgrades. But some of the money has also gone into new projects. OICCI member firms represent 14 different businesses sectors and they have invested in new projects across those sectors of the economy.”

He said foreign direct investment flowing into Pakistan was less 1pc of its GDP, lower than other regional countries like India and Bangladesh and required to be raised to at least 3pc of GDP.

“New investors look at (the) existing investors to see if they are reinvesting. This is something the government should use to attract foreign investment. The OICCI wants to speak on behalf of the country (to attract new companies). We have no agenda. We are objective.

“Investors always have a choice of investing in Pakistan, in neighbouring countries and elsewhere in the world. Reinvestments are a very strong signal of our belief in Pakistan.”

He urged the government to abolish the super tax that was levied for one year but now has been extended into its third year, pay tax refunds, solve post-devolution interprovincial issues, reduce corporate tax, facilitate legitimate repatriation of dividends (to foreign shareholders of companies).

“These are a few easy things that can be done. Businesses like consistency, predictability and transparency. The government can form a kind of federal council to work with the investors to improve ease of doing business ranking, and remove the impediments like multiplicity of (provincial and federal) regulations, higher tax burden on documented sectors, and so on, and attract new foreign investment.”

Uncertain 2018: With elections approaching, Mr Olierhoek feared uncertainties to increase over the next several months. “…before the next elections the government will be focusing on voters in this transition period as opposed to decisions that have long-term impact (on the economy). That leads to a bit of uncertainty. But of course business goes on as usual.

“Overseas investors look at long-term perspective on the economy… and the long-term perspective is that Pakistan still has enormous potential in different business sectors. That explains why OICCI members are consistently more bullish than overall and 87pc of them say they would continue with their investment plans for 2018.”

Published in Dawn, The Business and Finance Weekly, March 19th, 2018