Is Pakistan’s new investment solution likely to promote adverse selections in FDI?
The objective behind the establishment of the Special Investment Facilitation Council (SIFC) is to expedite investments by Gulf investors through a 'whole-of-the-government' approach, providing a one-window solution that coordinates procedures and cooperation mechanisms with different federal ministries and provinces to create a more investor-friendly environment. While streamlining policies and removing bureaucratic hurdles that hinder investments – not only from the Gulf but also from investors in general – is necessary, SIFC may not be the optimal framework for achieving this goal.
The council's discretionary powers raise concerns about distorting the rules of the game. For example, SIFC can recommend additional incentives or relaxations in the regulatory and policy framework for any 'individual' investment proposal it deems fit, which effectively undermines the modicum of transparency currently in the system. The authority to summon regulatory bodies and other federal government stakeholders to “relax or override the application of any existing laws or regulatory regimes” not only weakens the rule of law but also reinforces the perception among a wider array of investors that Pakistan lacks a level playing field for investments.
The inclusion of the leadership of Pakistan’s security apparatus in the SIFC apex committee and involvement in the policy implementation raises questions about undue influence. With armed forces welfare foundations' already running many commercial entities, inclusion in the Council expands its role in the country’s economic activities. This places it in a position where it could be perceived, however unfairly, to influence laws and regulations to align with its interests. It is important that the vital state institution not only remains, but is also seen to be free from conflicts of interest concerning the general welfare of Pakistanis.
According to the 2022 World Justice Project (WJP) index, Pakistan ranks 127th out of 140 countries in terms of regulatory oversight. Countries ranking below Pakistan are among the world's most economically underdeveloped. The potential introduction of arbitrariness into the system by the SIFC, particularly in light of potential conflicts of interest, could further erode trust in the regulatory framework and the system as a whole. Instead of bolstering confidence, the inconsistency in the legal framework could deteriorate the investment climate in the country and make it less attractive for investments that enhance the system's productivity and the country's competitiveness.
It is important that the vital state institution not only remains, but is also seen to be free from conflicts of interest concerning the general welfare of Pakistanis.
Over the past few decades, Pakistan has witnessed a decline in Foreign Direct Investment (FDI) as a percentage of GDP. Despite the majority of FDI being granted privileges such as extended periods of protection and guaranteed returns, these have not helped improve the country's competitive landscape or boosted foreign investment. The potential introduction of generous facilitation policies designed to attract only a specific group of Gulf investors could further worsen the trend. Other investors may not want to compete in a market where a select group receives special privileges. Over the past year, restrictions have been imposed on the repatriation of profits, which has already damaged the confidence of existing foreign investors, some of whom have exited Pakistan or are looking to do so. Discriminatory policies increase uncertainty and render Pakistan less appealing for FDI, except for those promised exorbitant returns.
The country’s policymakers should have learned from the mistake of providing extraordinarily generous guaranteed dollar returns to Independent Power Producers, which has resulted in significant electricity tariff increases and harmed industry competitiveness, especially in the export sector. The short-term gain of attracting investment into the country has come at the cost of harming Pakistan's long-term competitiveness and sophistication of the economy. It is also unclear whether the capital-intensive projects being put forward, inter alia, corporate farming, mining, and refining will serve to alleviate the balance of payment (BOP) challenges that Pakistan needs to urgently address.
To do so Pakistan needs to boost exports by developing international linkages and opening up the economy to attract investments that make Pakistan one of the manufacturing hubs in the global value chain of different sectors. This requires a structural transformation that encourages competition and innovation. It must avoid short-term expediency and instead ensure greater transparency, uphold rules-based policy-making, and strengthen institutions to enhance trust in the system. Doing so could help Pakistan attract investment in technology to set up manufacturing that sells to the world.
Investment in the building blocks of a more sophisticated economy must seek to help Pakistan make headway in technological convergence with developed countries over time, thereby not only providing a boost to economic activity immediately but ensuring that it is sustained over the long term. SIFC does not appear to promise that, and instead, could result in an adverse selection of foreign investors. The failure to ensure a level playing field through the provision of uniform application of laws and regulations could discourage the entry of high-quality international investors. Such a potentially detrimental long-term impact on the investment environment should dissuade Pakistan from taking SIFC forward.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.