Foreign Direct Investment in Pakistan - Opportunities and Challenges

FOREIGN DIRECT INVESTMENT IN Opportunities and constraints
PAKISTAN
November 17, 2018 ZEESHAN SHAHID, ACA | PARTNER, FORENSIC & CONSULTING, DELOITTE PAKISTAN
FDI Overview
FOREIGN DIRECT INVESTMENT (FDI)
FDI is an investment made by a firm or individual in one country into business interests
located in another country. Generally, FDI takes place when an investor establishes
foreign business operations or acquires foreign business assets, including
establishing ownership or controlling interest in a foreign company.
Foreign direct investments are distinguished from portfolio investments in which an
investor merely purchases equities of foreign-based companies.
FDI PERSPECTIVES
Investor
 Relatively high return with low risk
 Even playing field
Host country
 Relative competitiveness with other host countries
 Ease of doing business
KEY DETERMINANTS OF FDI
Business / Investment climate
Ease of
Corruption doing
FDI
business
Security
situation
FDI IN PAKISTAN SWOT and Current State
SWOT ANALYSIS OF PAKISTAN’S BUSINESS
CLIMATE
Strengths Weaknesses
Domestic market growth potential Corruption
Market size Bureaucracy
Availability of natural resources Regulatory obstacles to business
Educated, skilled, motivated workforce Inadequate government policy, transparency
Weak corporate governance
Security problems
Weak FDI promotion
Opportunities Threats
Economic growth Political instability
Macroeconomic stability Poor image
Low cost advantage Over dependence on natural resources
Good relation with Islamic countries Macroeconomic instability
Inadequate progress on legislation, regulation and
terrorism
FOREIGN INVESTMENT REGIME Key Challenges
CHALLENGES LEADING TO RELATIVELY LOWER FDI
Despite a relatively open foreign investment regime, Pakistan remains a challenging
environment for foreign investors.
Key challenges include:
 An improving but unpredictable security situation
 Difficult business climate
 Lengthy dispute resolution processes
 Poor intellectual property rights (IPR) enforcement
 Inconsistent taxation policies
EASE OF DOING BUSINESS
Starting a Dealing with Getting Registering
business construction electricity property
permits
Getting Protecting Trading

credit minority Paying taxes across
interest borders
Enforcing Resolving Labor market

contracts insolvency regulation
EASE OF DOING BUSINESS (CONT’D)
EASE OF DOING BUSINESS (CONT’D)
FOREIGN INVESTMENTS POLICIES REGIME
• World Bank’s analysis on Services Trade Restrictive Index (“STRI”) states that Pakistan has one of the most liberal investment policy regimes and
public-private partnership frameworks in the entire South Asian region. Pakistan is open to all sectors for investment, except restricted ones
pertaining to national security and public safety. 100% foreign ownership is allowed in all sectors except for airlines, banking, agriculture and
media. Foreign companies can own land if they are incorporated in Pakistan. As per the financial regulations, there is no restriction on currency
convertibility, repatriation of capital, remittance of profits or royalties, except for franchise.
• Following legal and policy instruments directly relate to Foreign Investment in Pakistan:
• D
Foreign Private Trade Related Investment
Protection of Economic FDI Strategy Foreign Exchange Foreign Companies
• D
Investment (Promotion &
Reforms Act, 1992
Investment Policy 2013
2013-17 Regulation Act, 1947 Regulations, 2018
Policy Framework
Protection) Act, 1976 2015-23
• D
• D
• An Act for promoting • An Act to provide for • The goal of Investment • Formulated by Board of • The object of this Act is • This regulation aims to • An integral part of the
and protecting
• D furtherance and Policy 2013 is to address Investment (BOI), this to regulate, in the oversee regulations upcoming Strategic Trade
foreign private protection of economic and adjust economic Strategy focuses on economic and financial pertaining to Policy Framework (STPF)
investment in• Pakistan.
D reforms, to create a priorities in the face of generating FDIs in interest of Pakistan, registration, 2018-23, which incentivizes
liberal environment changing global scenario of Pakistan. It also envisages certain payments, operations and other and facilitates investment in
• D
for savings & economic slowdown coupled special programs to dealings in foreign corporate related the export oriented and
• S investments and with domestic difficulties of promote linkages exchange, securities, matters for effective import substituting industries
matters relating power outages and between domestically and import/export of monitoring of foreign through policy reforms,
• S thereto. continued pressure on foreign-owned private currency and bullion. companies in Pakistan. predictable tariff structure
• D economy due to war on enterprises. and regulatory
terror. transparency.
• S
• Note: The legal and policy instruments mentioned above are not exhaustive but highlight the most relevant ones. Therefore, consultations with legal advisor is
recommended to seek advice on a particular transaction.
POLICIES DIMENSIONS
In the past decade, Pakistan was unable to attract sufficient foreign investments and
remains a low priority country for foreign investors.
Previous government introduced an updated Investment Policy, liberalizing investment
policies in most sectors, and created incentives through the Strategic Trade Policy
Framework (STPF) and Export Enhancement Packages (EEP).
STPF and EEP incentives are largely industry-specific and include tax breaks, tax
refunds, tariff reductions, the provision of dedicated infrastructure, and investor
facilitation services.
Pakistan also designated special economic zones (SEZs), none of which are fully
operational but have attracted some actual investment and are available to anyone.
SEZs offer a separate basket of incentives to potential investors.
POLICIES DIMENSIONS (CONT’D)
Improved security environment, large energy projects under CPEC, and improvements
in macroeconomic stability have played a key role in the improvement of FDI in FY
2017.
The macroeconomic environment has deteriorated over the past year with a rapidly
expanding current account deficit and declining foreign reserves resulting in the new
government embarking upon an effort to mobilize fiscal alliances and arrangements
with partner countries.
China was the single largest FDI contributor in Pakistan in FY2017, contributing more
than 45 percent of Pakistan’s total FDI.
Lowest tax-to-GDP ratios in the world – approximately 12.5 percent in 2017. Heavy reliance
on multinational corporations for tax collections. Federal and provincial tax regulations
difficult to navigate.
World Bank’s Doing Business 2019 report notes that companies pay 47 different taxes,
compared to an average of 27.6 in other South Asian countries. On average, it takes
businesses over 293.5 hours per year to calculate the payments required under the federal
and provincial tax regulations.
Since 2013, the government has requested advance tax payments from companies,
complicating businesses’ operations as the government intentionally delays tax refunds.
There are no laws or practices that discriminate against foreign investors, though enforcement
remains a concern. The Foreign Private Investment Promotion and Protection Act (1976) and
the Furtherance and Protection of Economic Reforms Act (1992) provide legal protection of
foreign investors and investment in Pakistan. All sectors and activities are open for foreign
investment unless specifically prohibited or restricted.
The specialized investment promotion agency of Pakistan is the BOI responsible for
the promotion of investment, facilitating local and foreign investors for speedy
materialization of their projects, and to enhance Pakistan’s international
competitiveness.
BOI assists companies and investors who intend to invest in Pakistan and facilitate the
implementation and operation of their projects.
Though BOI is the key point of contact for prospective investors, both domestic and
foreign, they remain one of the most ineffective federal government agencies
Pakistan according to US Dept. of State 2018 Investment Climate Statements issued
by the Bureau of of Economic and Business Affairs. The same statement suggests that
Provincial BOIs have varying levels of effectiveness.
POLICIES DIMENSIONS – FOREIGN OWNERSHIP
No minimum investment requirement or upper limit on the share of foreign equity is allowed,
with the exception of the airline, banking, agriculture, and media sectors.
Foreign investors in the services sector: 100 percent equity; repatriate 100 percent of profits.
In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed,
while in the agricultural sector, the threshold is 60 percent.
There are no restrictions on payments of royalties and technical fees for the manufacturing
sector, but there are restrictions on other sectors.
The tourism, housing, construction, and ICT sectors have been granted industry status, eligible
for lower tax and utility rates compared to commercial sector enterprises, including banks and
insurance companies. Small-scale mining valued at less than Pakistan Rupee (PKR) 300 million
(roughly USD 2.6 million) is restricted to Pakistani investors
POLICIES DIMENSIONS – FOREIGN OWNERSHIP
(CONT’D)
The Foreign Private Investment Promotion and Protection Act stipulates that foreign
investments will not be subject to higher income taxes than similar investments made
by Pakistani citizens.
While Pakistan’s legal code and economic policy does not discriminate against
foreign investments, enforcement of contracts remains problematic due to a weak and
inefficient judiciary.
OTHER CHALLENGES
Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes.
However, due to an active but weak and inefficient judiciary, most foreign investors include
contract provisions that provide for international arbitration to avoid protracted disputes.
Despite offering substantial financial, investor service, and infrastructure benefits to reduce the
cost of doing business, Pakistan’s SEZs have struggled to attract investment due lack of basic
infrastructure.
As announced in April 2015, Pakistan intends to establish nine SEZs under China Pakistan
Economic Corridor (CPEC). Despite significant media attention, CPEC SEZs are still in nascent
stages. These SEZs provide investors with a tax holiday of 20 years and are open to all
investors.
Privatization
Corruption
Insufficiently skilled labour
AN EXAMPLE TO FOLLOW? Ireland
A STUDY SHARES WHAT DISTINGUISHES BEST-IN-
CLASS FDI ATTRACTORS
Ireland (Celtic tiger)
 Irish Model Success – Advocated to be replicated in some bits and pieces as each country is unique
politically, socially, economically and technologically.
 Low tax and generous investment incentives
 Availability of young, educated and productive labour
 Quality of education high; available to all
 Turnover usually stays below European average; availability of experienced resource to owners; low annual cost of training.
 High “Flexibility and adaptability of workforce when faced with new challenges
 Strong government support for foreign investors
 one stop shops for assistance, cooperation and advice
 Agencies communicate valuable data about foreign investors and their feedback to support evidence-based policy development.
 Developed infrastructure (telecommunications etc)
 Other factors (political and economic stability, English language, currency stability, culture – close and
understandable to European investors)

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FOREIGN DIRECT INVESTMENT IN Opportunities and constraints

Business / Investment climate

Getting Protecting Trading

Enforcing Resolving Labor market

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