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Foreign investment in Pakistan.

Mr. Zahid Zaheer is a honours graduate of London University. He is a UK qualified Chartered Engineer, and has worked in multinational companies for over 35 years. He was Managing Director of Pakistan Cables a subsidiary of BICC plc for over 13 years. He has also been a Management Consultant for four years. Mr. Zaheer has served as member of the governing body of the Pakistan Institute of Management. He is the immediate past president of the Management Association of Pakistan, and is presently the Secretary General of the Overseas Investors Chamber of Commerce and Industry. The view expressed in this article are not necessarily that of the Overseas Chamber.

The Need for Investment

Pakistan has like other developing countries sought the way out of economic malaise through industrialization. Barring the first few years of the process and the eighties, the industrialization efforts has been very regressively implemented. Investment allocative decisions taken by strongly entrenched bureaucracy have shown distinct disadvantages. The illusion that an industrial society is a desirable one is predominant in the less developed countries (LDC's). Those with a high population need a sector which can absorb large employment. Policy makers take it upon themselves to undertake measures to accelerate industrialization.

Governments of the day consider that they have a duty of care towards their countrymen and the nation. Although most of them have laudable objectives, the actual action seems to fall short. We have seen in this country the result of volatile policies which have retarded industrial progress and increased uncertainty. We have also seen policies that have been based on rhetoric and moral injunctions, clearly the advocacy of these policies have meant insurmountable hurdles in actual implementation. Some policies have been such that governments have been unable to see them through resulting in considerable loss of time, effort and financial loss.

Governments preoccupation with industrialization in many cases leads to a permanent institutional framework to look after unprofitable industry. A bureaucracy unaware of product requirements feels it can marshal the economy in terms of investment. Incentives, reliefs, and concession become part of the industrial development strategy. This invariably leads to shortage of resources, as we have seen in Pakistan, resulting in excessive borrowing both internally and outside the country. While the capacity to borrow gets saturated, the rhetoric of self reliance gets louder, and the printing of currency notes becomes significant. Inflation becomes rampant wiping out all savings, and hence little is left for investment. The appetite for investment both domestic and foreign continues to grow.

Foreign Investment in Pakistan

Foreign investment in developing countries, and Pakistan is one of them if used appropriately can play an important role in industrial development and growth of the economy and can have a significant impact on creation of employment opportunities, stimulation of local enterprises and result in increased availability of quality goods, and services at economical prices.

The Size and Pattern of Investment

The number of companies incorporated in Pakistan in which foreigners held interest have increased from 27 to 448, with almost forty new entrants in the year 1989. The branches of foreign firms and companies have also increased to 142. The number of partnerships remain small at about half a dozen. The total foreign investment in Pakistan which stood at nearly rupees three billion in the early 70's increased to rupees eight billion in 1990. In the last decade it has increased from rupees eight billion to rupees forty billion. In US dollar terms the total foreign investments are about dollars two billion in 1990 compared to dollars six hundred million in 1971. Almost forty per cent of this investment is owned by firms or companies registered or incorporated outside Pakistan, and sixty per cent joint stock companies incorporated in Pakistan having foreign participants.

Of the total foreign investment of nearly rupees forty billion almost forty three per cent is in the manufacturing sector and nearly forty per cent in commercial activity, mining and quarrying has about 7.5 per cent and about 9.5 per cent in other activities. The share of manufacturing in the total investment has dropped from about 70 per cent in 1984 to 43 per cent in 1989 whereas the share of investments in Commerce has increased from 12 per cent in 1984 to about 40 per cent in 1989.

The other notable change that has occurred is that in 1971 the firms/companies registered or incorporated outside Pakistan represented only 14.5 per cent whereas Pakistani joint stock companies having foreign participation represented 87.18 per cent of the investment. Today, it is 40 per cent for enterprises incorporated outside Pakistan and 60 per cent for enterprise incorporated inside Pakistan. The major share of the total foreign investment comes from USA (22%), followed by UK (15.75%), International Financial Institutions (9%), Germany (7.70%), UAE (5.8%), Switzerland (4.54%) and Japan (4.5%).

The net inflow of foreign investment in early 70's for a single year was rupees twenty-three million ($4.9 million), in 1974 it was rupees one hundred and twelve million ($11.3 million), in 1984 rupees five hundred million, in 1986 rupees seven hundred and fifty million and in 1989 nearly rupees four billion, in 1990 it is around rupees four and a half billion (US $200 million). In the last two years nearly 60 per cent of the investment has from USA and between 10-12 per cent from UK, 5 per cent from France and 5 per cent from Korea. The pattern of sectorwise investment is also changing. In the year 1989 investments in Mining and quarrying (rupees two billion) have been larger than commerce (rupees seven hundred and fifty million) and manufacturing (rupees three hundred million).

Policies for Investment

The Seventh Five Year Plan envisages rupees eighty-eight billion for investment in the private sector as against rupees nine billion in the public sector. Thus the allocative share of the private sector is 90 per cent of investment. To make this possible effective fiscal and monetary incentives have to be given to attract private investment. The opening up and liberalization of the economy and deregulation of the sanctioning and regulating environment will have a positive effect on the investment climate in general and should attract foreign investment. The removal of restriction on foreign equity holding in industry is a significant change, which will also have repercussions on the local development of industries. The relaxation of controls has made it possible for foreign investors to acquire majority control in any company and it is expected that foreign investment will move towards more profitable ventures, be they in any sector whatsoever, and not necessarily high technology products.

The government of Pakistan has always attached great importance to the inflow of foreign private investment in accelerating the pace of Industrial development in Pakistan. It is however, necessary to review how these policies have changed over the past four decades. In the early fifties it was decided that the service sector was to be restricted to local investors and foreign investment would not be allowed in the field of banking, insurance and commerce. However, this policy was later liberalized and foreign banks were allowed to open branches in Pakistan.

Under the economic reforms order of 1972, the government nationalised the large industrial concerns falling within ten major categories of industries. However, all foreign investment was exempted from the purview of this order and foreign investment was not touched. After 1977 the government decided to turn around this policy and opened up a larger field for private sector investment through a demarcation between public and private sector, within the ten categories earlier reserved for the public sector under the economic reforms order of 1972. In 1976 an Act of parliament was passed for the promotion and protection of foreign private investment. This was followed by a Presidential Order in 1979 for protection of industrial property rights of investors.

Then in 1984, a process of deregulation was initiated and a comprehensive industrial policy statement was issued. To encourage foreign private investment in industrial projects involving advanced technology and heavy capital outlay, like engineering, basic chemicals, electronic and other capital goods industry. This policy renewed the role of the private sector, along with continued public sector participation. But even one per cent foreign equity in a project required prior government approval. A new industrial policy package was introduced in 1988 which was based on the primacy of the private sector. Unprecedented and new incentives were provided in this new package. With the change of government in 1989 it was modified with additional policy initiatives.

In 1989 only projects with more than 49 per cent foreign equity required government approval, but if the cost exceeded Rs. 100 million government approval was also required. In 1984 Government approval was required for fourteen industries, it was reduced to seven in 1989, it has been further reduced to only four, irrespective of the size of the investment. Outside the four areas no approval is required however large the ceiling. The following sectors of the economy are still not open to foreign investments: Agricultural land, forestry, irrigation, real estate, housing, commercial and office building, insurance, health and radioactive minerals.

The fruits of Investments

Empirical evidence presented confirms the small size and restricted nature of the foreign investments in Pakistan. It also reveals that anglo saxon investors hold more than 1/3 of the total investment in Pakistan. In the last few years the inflows from these sources have increased. The US now dominates the private capital inflows which is around sixty per cent, followed by UK which is nearly twelve per TABULAR DATA OMITTED cent of all the private capital inflows in the country. Also manufacturing is no longer the largest sector for foreign investors, the emphasis shifting to mining and exploration.

The private foreign inflows in Pakistan have been quite restrained and even at current levels are less than four per cent of the fixed private investment and two per cent of the gross fixed capital formation in the country. These small investments have been channelled into selective sub sectors, notably oil and gas, fertiliser, pharmaceuticals and light engineering industry in the recent years. In the earlier years, the dearth of manufactured items requiring simple technology like tea blending, tobacco processing and paint manufacture provided necessary stimulus for foreigners to invest in these industries. Early manufacturing took the form of processing raw materials for export, and assembling and packaging largely imported inputs for production of consumer goods in the domestic market. Therefore, in the early years of Pakistan, tobacco, pharmaceuticals, petroleum, and vegetable ghee industries received larger amounts of direct foreign investment.

The hesitance of foreign business to invest in Pakistan can be attributed to the perceived high political risks, excessive government control, cumbersome investment sanctioning procedures, high effective corporate taxes, unrealistic indigenousisation and location policies, and severe physical and social infrastructure shortages. At least two of the above constraints now stand removed and the prospects look better today than ever before. The direct foreign private investment capital inflow into the third world countries is around US $ twenty billion per annum and Pakistan's last year claimed receipts of US $ two hundred million. This represents only one per cent of the available potential in the third world countries.

A recent survey of one hundred foreign investors in Pakistan revealed that the overall foreign component of their equity investment was rupees ten billion. These one hundred organizations generate an annual revenue amongst themselves of rupees forty billion, which is nearly 5 per cent GNP of the country. The organizations surveyed paid more than 52 per cent of the pretax profit as corporate tax, a sum of rupees two and a half billion of the total rupees forty billion revenue generated, nearly rupees fifteen billion was paid to the national exchequer as taxes, which represents 15 per cent of the total taxes collected by the exchequer. Nearly 40 per cent of all the indirect taxes paid by the private sector and 30 per cent of all the corporate taxes paid by the private sector come from these 100 foreign investors.

Amongst them they employ nearly 45,000 people at an average annual cost per employee of Rs. 75,000/-. Nearly Rs. 100 per annum per employee is spent on the training of these employees and almost Rs. 6,500/- per annum per employee is contributed to the national exchequer toward employee welfare related levies.

The significance of the figures will be appreciated if the reader was to bear in mind that these relate to only one quarter of the total foreign investment in Pakistan. These foreign investors reaped 16 per cent returns on their investment, and have only remitted a cash return of 8-1/2 per cent on their investment. They have contributed more than their share of tax revenues and also exercised social responsibility towards their employees.
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Author:Zaheer, Zahid
Publication:Economic Review
Article Type:Cover Story
Date:Nov 1, 1992
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