Pakistan is in dire need of foreign direct investment (FDI) to improve its foreign exchange reserves and to bridge the investment gap the country is currently experiencing. Such investments are crucial to boost its agricultural and industrial production, which can lead to job creation, increased exports, and the generation of additional tax revenues.
The agriculture sector has gained notable prominence among the sectors with significant potential for FDI, especially following recent media reports. Various factors, including the ongoing food crisis in the country, availability of uncultivated land spanning millions of acres, cost-effective workforce, and Pakistan’s conducive agro-climatic conditions to grow a wide range of crops, make a compelling case for promoting FDI in the agriculture sector.
Additionally, despite the high energy costs that have rendered several energy-intensive sectors uncompetitive and unviable in Pakistan, several sub-sectors within agriculture still continue to offer viable investment prospects, including corporate farming.
However, we should be very clear that corporate farming and agro-industries (production of agricultural inputs and agro-processing) are two quite distinct avenues for investment, each with its own merits and demerits.
Considering the complicated processes involved, undertaking corporate farming is easier for an investor than agro-industry
In Pakistan, considering the complicated and cumbersome processes and practices of government entities, undertaking corporate farming is far easier for an investor compared to setting up and operating any agro-industry. A farmer has to deal primarily with only the provincial revenue department (for land records and agricultural income tax), the irrigation department (if canal water is available), and the relevant electric power distribution company.
In contrast, an industrialist must engage with over a dozen government departments/authorities, in addition to hundreds of raw material suppliers, product buyers, and a large number of employees. Often, such frequent business interaction leads to conflicts and, in turn, decades-long legal proceedings in courts.
Because of all these hitches, the newly constituted Special Investment Facilitation Council (SIFC) is in a far better position to assure investors of a conducive investment climate and ease of doing business in corporate farming than that of agro-industry. However, there is another aspect worth considering.
In the realm of corporate farming, an investor needs capital investment for acquiring or leasing land, procurement of agricultural machinery, land development (if uncultivated), and irrigation and water resources development (especially high-efficiency irrigation solutions, where water availability is limited).
Additionally, potential capital outlays involve constructing access roads and providing electricity infrastructure. However, in many instances, the provision of roads and electricity is typically considered the government’s responsibility.
Unfortunately, Pakistan does not manufacture large-sized agricultural machinery, which is commonly used in corporate farming. Even the tractors manufactured within Pakistan are limited to a maximum of 85 horsepower. Therefore, a significant portion of FDI would be directed towards importing such machinery from other countries. The remaining will only be for leasing and land development expenses, which typically include the cost of diesel fuel and skilled labour.
Nevertheless, from a larger perspective, FDI in corporate farming holds the potential to benefit the country’s agriculture sector in numerous ways. Though, at this point in time, it is difficult to ascertain, among other things, the nature and type of crops to be grown under corporate farming, two strategic areas stand out as worthwhile pursuits for the country.
While corporate farming has its own merits, setting up an agro-industry through FDI holds even greater significance
First, Pakistan failed to capitalise on agricultural research and advanced seed production technologies. As a result, its enormous seed imports of agronomic and horticultural crops are on the rise, driven by farmers’ increased adoption of high-yielding/hybrid seeds.
Several countries, like India and Indonesia, went for public-private partnerships (with foreign partners) to increase local production of high-yielding seeds. This initiative aims to enhance the country’s crop productivity and farm incomes by ensuring the availability of affordable, high-yielding seeds. Such partnerships side-stepped the complex and lengthy process of developing new cultivars.
Second, despite Pakistan’s favourable agro-climatic conditions and a comparative advantage in oilseed crop cultivation, the country annually imports edible oil and oilseeds worth billions of dollars. In fact, oilseed crops like canola, mustard, sunflower, and maize (spring) have to compete with wheat — the major staple food of Pakistan, for the limited available land.
Expanding the country’s cultivated area (extensification) through corporate farming, if aimed rightly, can increase oilseed production to save a huge amount of foreign exchange.
While corporate farming has its own merits, setting up an agro-industry in Pakistan through FDI holds even greater significance. On one hand, Pakistan’s reliance on imports for essential agricultural inputs, such as fertilisers (excluding urea), pesticides, and various types of machinery (including harvesters, planters, balers, water pumps, electric motors, etc.), has been on the rise.
On the other hand, a significant portion of Pakistan’s agricultural exports comprise commodities (agricultural crops) without any significant value addition through primary, secondary, or territory processing.
Given the substantial size of the country’s agriculture sector, its existing low level of agro-industrial sophistication, and its limited scale, Pakistan must actively attract investments in both the agricultural inputs industry as well as agro-processing sector to address effectively the challenges of soaring import bills, suboptimal export growth, and ever-increasing rural poverty. But this demands a well-considered policy and strategic response.
In July 2023, the government approved Pakistan’s new Investment Policy 2023 with the aim of increasing export-oriented and import-
substituting FDI as well as local investments. Nevertheless, a conducive investment climate and an enabling business environment that can reduce the cost of doing business are a must to attract investments.
Without it, investors are likely to perceive the investment as risky. After all, the decision of an investor to invest in a specific country is invariably a rational one, primarily driven by an assessment of the associated risks and potential returns, and that is why high-risk investments are only pursued when they promise relatively high returns.
Khalid Wattoo is a farmer and a development professional. Dr Waqar Ahmad is a former Associate Professor at the University of Agriculture, Faisalabad
Published in Dawn, The Business and Finance Weekly, October 2nd, 2023