Scaring FDI away - Dr Ashfaque H Khan - Tuesday, February 01, 2011

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January saw the government taking two economic decisions which are tantamount to systematic destruction of the economy – investors’ confidence in particular. And it is the economic team led by the finance minister which administered the last rites to foreign direct investment (FDI) in Pakistan.

The first decision was the government’s forced reversal of the KESC management’s retrenchment of its 4,460 non-core workforce (drivers, security guards, sanitary workers, bill distributors and office attendants). This was nothing but brute interference by the government in the affairs of a private company. The second ill-judged decision was permission for the import of five-year-old cars. This is equivalent to destroying the auto-industry.

These decisions will have far-reaching impacts specifically on the investment climate. It goes without saying that FDI, being the single largest source of private capital flows, has contributed immensely to investment and growth in developing countries. It has also become a vehicle for transfer of technology, skills, and organisational and managerial practices to recipient countries.

Given the effective role that FDI can play in the acceleration of economic growth, developing countries have been making efforts to improve their policy environment to attract it. Countries lagging behind in attracting FDI are ones that faced macroeconomic instability, pursued inconsistent policies coupled with relatively poor physical and human infrastructures, and showed indifferent and unsympathetic attitude towards foreign investors.

The fundamental requirement that governs FDI in developing countries revolves around ten main factors. These are political stability, good law and order situation, economic strength, government economic policies, government bureaucracy, local business environment, infrastructure, quality of labour force, quality of life, and a welcoming attitude. These can, in turn, be classified into four C’s: cost, convenience, capability and concessions.

Pakistan made considerable efforts in improving the investment climate by improving upon the ten factors. Constant interaction with local and foreign investors and resolving their issues on priority basis used to be the hallmark of government policy. Such efforts bore fruit in the form of foreign investment surging from $543 million in 1999-2000 (or 0.8 per cent of GDP) to $8.423 billion in 2006-07 (or 5.9 per cent of GDP) – a more than 15-fold increase in just seven years.

The investment climate has deteriorated rapidly during the last three years, and the two new decisions are likely to prove to be the last nail in the coffin of foreign investment in Pakistan. Foreign investment has declined from its peak at $8.423 billion in 2006-07 to $2.086 billion in 2009-10 – a decline of $6.337 billion. During the first half of the current fiscal years, foreign investment stood at only at $1.051 billion.

The interference of the government in KESC affairs was completely unjustified. The KESC is a private company meant to provide electricity to the people of Karachi. It is not an employment bureau meant to provide unnecessary jobs. A Dubai-based private equity firm, Abraaj Capital, has 50 per cent shares, with management control. They posted a loss of Rs14.64 billion last year and the management is making efforts to turn the KESC into a profitable company. They have every right to run the company the way they want, in order to make it profitable. They offered a Voluntary Separation Scheme to 4,460 non-core employees, with amounts ranging from Rs700,000 to Rs4.5 million. The government not only failed to protect the lives and properties of the foreign investors but also prevented them from determining the size and skill of their workforce.

As far as allowing imports of five-year-old cars, the government has damaged not only the automobile sector but also the auto parts industries in Pakistan. The auto industries have invested heavily and expanded their production capacities. Against their capacity of 275,000 cars per year, they were expected to produce 160,000. In other words, these industries are operating at 58 per cent capacity. Allowing import of five-year-old cars would further reduce their capacity utilisation, thus raising the fixed cost per unit produced. The auto industry value chain has created over a million jobs and contributed billions of rupees in taxes. The government’s argument is that car prices are higher in Pakistan.

Has anybody taken into account Shaukat Tareen’s depreciation of the rupee? The Pakistani rupee depreciated by 30 per cent against the US dollar, which has itself depreciated against the Japanese yen by 22 per cent. The multi-currency depreciation, along with the rise in input prices in the range of 26 to 82 per cent, are responsible for the rise in car prices.

By taking these two decisions, the government will discourage foreign investment at a time when the country needed more non-debt-creating inflows. Do we still need the ministry of privatisation and the Board of Investment? Would they still be able to claim that Pakistan is a “heaven for foreign investors”? We invite foreigners to invest in Pakistan but at the same time we determine their profit margins and control their HR operations. Why should anyone come to Pakistan? There are countries which offer better investment climates with more welcoming attitudes.

The government has caused serious damage to the investment climate. It is nothing short of systematic destruction of the economy of Pakistan. The economic team, led by the finance minister, has become party to this destruction. Welcome to investment-friendly Pakistan which offers little protection to the lives and properties of foreign investors – at least under this democratic dispensation.

The writer is principal and dean at NUST Business School, Islamabad. Email: ahkhan

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