ISLAMABAD, Dec 28: The United States and the European Union have urged Pakistan to improve the security situation with a view to attracting adequate foreign investment in the country.

Informed sources told Dawn here on Tuesday that Pakistan was also asked to remove a general perception that 'tedious regulatory environment' was hurting foreign investment.

Pakistan, which received roughly $850 million FDI in 2003-04 and is now hoping to attract little over $1 billion foreign investment during the current financial year, was asked to take into account a large number of expensive litigation proceedings amounting to $800 million pending against it.

Nevertheless, the sources said the United States and the EU appreciated various positive steps taken by the Pakistan government to improve the investment climate and promote good governance.

They suggested that Pakistan could provide a sense of protection to foreign investors by joining the New York Convention and streamlining its foreign investment laws rather than signing a restrictive bilateral treaty with different countries.

"The US investment in Pakistan at present stands only at $300 million a year which needs to be enhanced following Islamabad's support to Washington in its war against terror," the sources said. Other steps like cutting red-tapism and strengthening procedures for foreign investment were also proposed to be taken by the government of Pakistan.

A joint study recently conducted by the Board of Investment and the Japan International Cooperation Agency also concluded that political instability, unsatisfactory law and order situation and bureaucratic hurdles were major obstacles in the way of attracting sizable FDI in Pakistan. It said that factors impacting FDI needed to be looked into seriously by the authorities.

It was pointed out that as a consequence of political instability, the law and order situation in the country suffered. Pakistan was reminded that rapid changes in governments resulted in new policies being announced before the old policies had time to deliver. Stability in the government results in stable policies.

"Red-tapism and bureaucratic snafus do exist in the country," the study said and added that in an attempt to overcome this failing, the government had made concerted efforts to attract management skills and know-how from the private sector into its various key ministries. Also, it pointed out, that Pakistan lacked in the area of infrastructure where land and power are expensive.

The study, however, appreciated various efforts of the government in order to boost investment. For example, the government has allowed investors to invest without obtaining permission from specified agencies related to the industry concerned.

This has been done with a view to helping ease the entry of a foreign investor into Pakistan. Pakistan has been making efforts to attract the FDI and such efforts have been intensified with the advent of deregulation, privatization and liberalization policies adopted by the government.

The total investment, the study said, had shown marked improvement in the medium-term rising to 16 per cent of GDP during 2003-04. The manufacturing sector remains the most attractive for investment and attracted the largest share of FDI today with 25 per cent of total investment brought into the country moving to this sector.

Pakistan is moving rapidly to enhance its infrastructure and develop its unutilized natural resources of power. The power and oil and gas sector attracted 22 per cent and 20 per cent investment, respectively. Information technology and telecommunication has also currently become an attractive avenue of investment.