Saturday, March 12, 2005

Integrated approach to Investment Promotion

Integrated approach to investment promotion
Jawaid Bokhari
KARACHI, Feb 1: The high economic growth rate in several countries is largely explained by large-scale investment, often described as the engine of growth. Pakistan is trying to emulate these growth models.
On January 28, the Task Force on Investment met in Islamabad to discuss steps needed to stimulate capital spending. One of the proposals made by a participant was that Pakistan should learn from the experience of China, Singapore and Dubai, countries that have been most successful in attracting foreign investment.
The Task Force has been set up in the background of slowing down of domestic investment as the current phase of modernization of textile industry is petering out and decisions made in the past, particularly, for oil explorations, account for current inflow of foreign direct investment.
Apparently, the situation in regard to investment is quite baffling. Despite financial stability, improved sovereign credit rating, IMF on board, abundance of bank liquidity, low interest rates, stable rupee and massive foreign exchange reserves, new investments are not picking up fast.
Traditional industries like textiles, cement, sugar and automobile suffer from excess capacity. Local investors do not have funds for buying public sector banks, telecommunication company and gas and oil firms, being privatized, and in exploitation of minerals that requires huge capital. The size of the market with a population of 140 million people appears big but shrinks when seen in the context of growing poverty.
The quickest return can be achieved by investment in modernization of agriculture whose development is handicapped by outdated farming and cultural practices.
And to quote Ali Nawaz Memon, senior financial and institutional development consultant based in Washington and co-coordinator of the Task Force January meeting "the prospect of attracting huge investment to Pakistan are bleak" unless he says, that an integrated approach to investment promotion is adopted.
He however sees potentials. Capital inflow is likely from investors of Pakistani origin, selected OIC members and multinational firms who are operating fully in the country. And that requires country - specific strategies for potentialinvestors, for Arabs, overseas Pakistanis and Americans and Europeans.
It goes without saying that the transition from military rule to democratic dispensation needs to be speeded up to convince democracy-conscious Europeans to invest. In this, the underlying principle is the rule of law and respect for commercial contracts.
In the current global environment, Europe, Japan and America are struggling for recovery and corporates are fighting for their survival and consolidation. So, not much can be expected. Efforts have to be therefore focussed on attracting Arabs and encouraging overseas compatriots to invest. It may not be difficult to mobilize resources from the Middle East at a time when Arab nationals are reducing their investments in USA and Europe.
The Chinese and Indian experience indicates that overseas compatriots can play a major role in economic development. And Memon believes that the recent world events have convinced non-resident Pakistanis that this is an appropriate time for investment of their capital in their home country. The funds available with them are substantial. Special package is needed for land acquisition and infrastructure.
But for the investment to pick up, much more needs to be done. In the presentation of his initial thoughts, Ali Nawaz Memon laments that Pakistan does not have a "national investment vision" and an integrated approach to investment promotion. "What is needed is a "national economic objective resolution" which should be widely discussed and approved by elected representatives. For co-ordination among economic ministers he poses the question: "Do we need an economic czar or National Economic Security Council?"
Currently, all economic policies are harmonized to achieve a singular goal, to improve government finances and fiscal stability. For this sole objective, the various institutions and organs of the state are working with set targets. There is hardly any effective co-ordination among various economic ministries and departments or an integrated approach to boost investment.
The CBR is given a target, it has to achieve irrespective of the consequences it would have on investment. The inefficient utility companies, with massive leakages of revenues, must be given tariff raise at the cost of development of a competitive industry. Commercial banks avoid long term lending. Each institution is working for its own mandate and the economy is directionless.
A common complaint of the investors is that good policies become worthless because of weak implementation. In discussions in the Task Force meeting, a former chief of army staff was quoted as follows "While I was COAS, I recommended a medium sized project sponsored by a retired army officer. I called the relevant Chairman. The sponsor was well received. However, it took 14 months to get required approvals." Business wants official decisions to come fast.
Investments are made on the basis of domestic demand and availability of export market. Pakistan is not part of any regional market at a time when regional trade is growing faster than global trade. Multinationals operating in the country say that Pakistan needs to enter into free trade agreements with neighbouring states. The only one that is being seriously negotiated is with Sri Lanka.
Investors expect a lucrative rate of return. In his paper on: Pakistan: "An integrated approach to investment promotion," Memon quotes financial data relating to existing MNCs that indicate that average return has varied from 14 to 60 per cent for 1996-2001. Lever Bros has earned average return of 60 per cent. Hubco has earned average return of 38 per cent, National Refinery 31 per cent and Nestle Pakistan 25 per cent.
The challenge facing Pakistan is how to convince foreign investors that return to risk ratio is acceptable and, no less important, is the building of a positive country image, says Memon.


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