Barrier to foreign investment

Published September 22, 2023
The writer is an advocate of the Supreme Court of Pakistan
The writer is an advocate of the Supreme Court of Pakistan

THE words “to attract investments from friendly countries in identified sectors through an empowered organisation that serves as a ‘single-window’ platform for facilitation, and to improve the ease of doing business for potential investors through a ‘Whole of Government Approach’ — achieving optimal horizontal-vertical synergy and facilitation by the Pakistan Army” of the mission statement of the Special Investment Facilitation Council demonstrate a powerful vision.

However, if we navigate the SIFC’s website, one significant aspect is absent — substantial focus on contract enforcement. The undeniable truth is that foreign investment is a vital driver of economic development in any nation, igniting growth and job creation, as well as raising living standards. Yet, the lack of effective contract-enforcement mechanisms in the country stands as a large roadblock that deters foreign investors from channelling their capital into the country.

When contracts are enforced fairly and reliably, businesses and consumers can enter into agreements with confidence, knowing they will be held accountable for their promises. This creates an environment conducive to economic growth and prosperity for all stakeholders involved. Yet, the harsh reality is that contract enforcement in Pakistan remains a challenging endeavour, and this presents significant repercussions for foreign investment.

For instance, consider the case of a multinational company that took the decision to file a suit for the appointment of an arbitrator before a high court in the country three years ago. This legal action was directed towards a government statutory authority, stemming from a dispute related to a construction contract. Before initiating the lawsuit, according to the MNC, it had made numerous attempts to communicate with the statutory authority, urging them to appoint an arbitrator.

The lack of effective contract-enforcement mechanisms in the country deters foreign businesses.

Regrettably, these efforts yielded no results. It seemed that, for reasons known only to them, the concerned authority was hesitant to engage in a legal resolution of the matter and as of today, we find ourselves in a situation where a decisive verdict has yet to be delivered. Several urgent applications seeking an expedited hearing have been submitted by lawyers representing the MNC, but these efforts have yet to yield results.

On many occasions, the statutory authority’s legal representation has been absent from court proceedings. Meanwhile, the court either appears to lack the time to address the matter due to a busy docket or, perhaps, for other reasons, may not be very interested in moving the case forward. In such a situation, it is understandable that the affected party’s frustration would grow, especially if the claim amount, denominated in Pakistani rupees, continues to decrease in value in terms of dollars due to the ongoing depreciation of our currency.

Contracts are the cornerstone of modern business transactions, providing a vital legal framework that ensures that parties fulfil their obligations and receive their agreed-upon benefits. In Pakistan, as in any other nation, contracts serve as the lifeblood of commerce, governing everything from international trade agreements to local partnerships. When contracts are honoured and enforced consistently, they foster trust, reduce business risks, and beckon foreign investors. Yet, enforcing contracts in Pakistan presents a multifaceted challenge.

The legal system in Pakistan is notorious for its inefficiency and backlog of cases, often causing contract disputes to linger in the courts for years, resulting in substantial financial losses and discouraging potential investors. This sluggish pace of justice erodes trust in the legal system, making businesses hesitant to invest here. Investors demand a predictable and steady legal environment to commit their capital; the inability to enforce contracts simply erodes their confidence and ends up making Pakistan a less appealing destination for their investments.

Moreover, inconsistencies in how the laws here are interpreted and applied can create confusion and unpredictability, qualities that foreign investors abhor when seeking a stable and secure environment for their investments. Vague or ambiguous contract terms can lead to protracted legal battles, further deterring investment. This, coupled with corruption, that is pervasive in Pakistan’s public and private sectors, frequently infiltrates contract enforcement, where bribery and undue influence can easily derail the legal proceedings, ultimately favouring the party with greater influence, and thus undermining the basic principle of equal protection under the rule of law.

The repercussions of this lack of effective contract enforcement are palpable in the realm of foreign investment. Investors demand a predictable legal environment to commit their capital, and the inability to enforce contracts erodes their confidence, making Pakistan a less appealing destination. Consequently, economic growth and job creation stagnate in the country.

To address this pressing issue and attract foreign investment, Pakistan must adopt a comprehensive strategy. The government, in collaboration with the judiciary, should invest in strengthening the legal system by increasing the number of judges, introducing specialised commercial courts, and implementing technology-driven measures to expedite case disposal. Streamlining legal processes will enhance investor confidence.

Simultaneously, Pakistan should consider revising and modernising its contract and commercial laws in order to align them with international standards, thereby reducing disputes and facilitating smoother enforcement. In addition, vigorous anti-corruption efforts are crucial to reducing bribery and undue influence in contract enforcement. This involves enhancing transparency, implementing strict penalties for corruption, and fostering a culture of accountability in both the public and private sectors.

In conclusion, the lack of effective contract-enforcement mechanisms in Pakistan stands as a major roadblock to attracting foreign investment.

To unlock its true economic potential, Pakistan must create a business-friendly environment where contracts are consistently upheld, and make genuine efforts towards become a more attractive destination for foreign investors, ultimately driving economic growth and prosperity for its people.

The writer is an advocate of the Supreme Court.

Published in Dawn, September 22th, 2023

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