The World Bank President, James Wolfensohn, has said that terrorism is not unique to Pakistan.This statement has gladdened the hearts of Pakistani officials and others interested in promoting investment, particularly foreign investment.
That affirmation after the suicide bombing which resulted in the death of 11 Frenchmen and injuries to far more in Karachi on May 8 has been re-echoed at the Shanghai investment conference sponsored by the Asian Development Bank by Shaukat Aziz.
Pakistanis are also relieved by the statement of the British deputy high commissioner for economic relations with Pakistan, Roger Skykes that Britain’s investment policy in Pakistan had not been changed by the May 8 incident. Britain is the second largest investor in Pakistan after the U.S. and invested $22.3 million in the first nine months of this year ending March 31.
But such statements should not be taken on their face value; in the West it is not the government which decides the investment policy with friendly countries but the private investors who take into account a host of factors, both positive and negative, and their cumulative impact.
They take into account the profitability of their enterprises, scope for expansion and larger profits possible later and export possibilities to the regional states. By that standard the economic growth rate here since 1995 has been small, and corporate growth, except in small areas, has been pretty low. In such situations foreign investors do not come up with large investments and prefer to play safe by expanding the existing facilities, wherever possible.
Finance minister Shaukat Aziz says we need larger foreign investment to promote larger exports, particularly quality and value added exports. That is undoubtedly true. Foreign brand names have better acceptability in the region than local products with less familiar brand names.
Brookbond was once exporting dates under its label. And it was also exporting spices and Masala. They had pretty good acceptance in the region because of the image of the foreign company. Modern consumers are not ready to take risk with uncertain food items packaged by unknown companies.
“We will never achieve aggressive export goals unless we bring in foreign investment,” he says. We need larger investment to upgrade the quality of our exports and improve their international acceptance.
He says we need foreign investment even to meet our local needs.The ICI and Levers Brothers which meet the need for a great many consumer products testify to that. British Oxygen is another example. A number of multinational pharmaceutical companies meet our need for a large number of drugs, an area in which the Pakistani companies have made small headway. Foreign pharmaceutical companies are exporting some of their products as well.
The finance minister says; we have to improve our infra-structure, remove the irritants and push hard to establish export processing zones in order to facilitate investment.
The infra-structure for large scale manufacturers is vastly inadequate. There is a shortage of electricity, and break-down in supply and load-shedding are too common. Investors have to set up their own power units and that is costly when borrowed capital is used.
Water is in short supply. Even if tankers are organised the supply can be disrupted by strikes,hartals and the tanker Mafia.
Roads are inadequate and small and too congested in the cities. And transportation is costly because of the high duties on the vehicles, the 15 per cent sales tax and the heavy insurance cost and even the high tax on insurance.
Traffic on the roads is poorly managed and there are too many deaths and injuries. And there is heavy corruption in the ranks of the traffic police.
Investors and their staff in Pakistan are concerned over not only terrorism and political violence but also with the pervasive crimes which begin with the common car snatching; investors and their senior staff need protection by guards at their factories and homes and as they move around the city, which they find vexing and an invasion of privacy of their families.
Foreign investors are also concerned over our attachment to Islamic banking which has been vexing them for the last 16 years. Now the government is to move the Supreme Court to ask for the reversal of its verdict in favour of Islamic banking. That was an issue which held up the progress of work on HUBCO in the earlier years.
In reality, the foreign investors find money too costly in Pakistan because of the high interest rates compared to the much of the rest of Asia and the world.
Everything around here they find has a cost push effect which reduces their profits as well as larger consumption and scope for expansions of their factories.
Labour is relatively cheap but its productivity is low, and there are too many holidays, holy days and ‘hartal’ days. So the working hours lost are too many.
If the workers were educated and trained their productivity would have been higher; but most of them are uneducated and poorly trained, if trained at all.
Corporate taxation is not heavy, although higher than in the East Asian countries but the number of taxes is too large - around a 100 inclusive of federal, provincial and local taxes. And corruption in the taxation services makes the tax burden too heavy.
While the policy makers welcome foreign investors, the bureaucracy at the lower levels is not helpful. Federal, provincial and local body officials they have to deal with are corrupt or unhelpful or bound down by red tape. That is what Shaukat Aziz calls irritants. There has been a great deal of talk about one-window operation for investors but that has been more of a slogan than even a partial reality.
Relations with India which are often too tense also matter to foreign investors. When there is talk of war or when the army of India is massed on our borders, they are concerned. So also major happenings in Kashmir like the killing of 23 persons in Indian occupied Kashmir on May 14.
When the killing of Americans like the murder of the Wall Street Journal reporter Daniel Pearl, the bombing of the Church in the diplomatic enclave in Islamabad or the suicide bombing in Karachi results in the recall of diplomats except the very essential and the dispatching of the family members to their homes, foreign investors see that as a red signal. The left-over diplomats cannot seriously advise large investors from their country to come and make substantial investments in Pakistan, except in areas of assured profits like gas and oil which are attracting international attention still.
But the overall foreign investment in Pakistan in the first nine months of this year ending March 31 has been only $287.4 million. Although that is 24 per cent more than the investment in the same period last year, the overall-investment is very small and did not touch even 400 million dollars in the period, while our expectation in the past had been between one billion and two billion dollars a year. In the first nine months of this year the U.S. led the way with $164 million of investment.
We need foreigners to be interested in not only direct investment or portfolio investment but also in the privatization of our large public sector units, like United Bank, KESC, the two major gas companies, etc. And we need the right buyers who will not only pay a fair price for each unit but also make large investments and expand the facilities.
Some Arab investors are interested in rather small units as they can afford them and feel good to own such units by themselves; but what is at issues is the larger units which the IMF and the World Bank are pressing us to sell quick.
Of course, the kind of social life foreign investors have to lead and their managers in Pakistan because of our restraints or subterfuges is also a deterrent or an irritant. That would not matter much if the profits were large and the prospects for business expansion was large; but there are checks in this area because of fiscal and financial factors and policy restraints that has promoted a low economic growth since the middle of 1990s.
Clearly if we want large foreign investment we have to tackle the many restraints and policy constraints at every level and find solutions for them. That may not be easy in our context, but without solving them, foreign investment will not come in a big way, and certainly not on the scale on which we need it in a country of 140 millions who need jobs and a better life.