INVESTMENT POLICY FOR PAKISTAN
2009 to 2015
PUBLIC PRIVATE DIALOUGE
TABLE OF CONTENTS
EXECUTIVE SUMMARY
4
ABBREVIATIONS
14
1.
OBJECTIVE & APPROACH
16
2.
PUBLIC-PRIVATE POLICY DIALOGUE (PPPD)
19
2.1.
2.2.
2.3.
Purposes
Structure and Modus Operandi
Umbrella Function
19
20
24
2.3.1.
2.3.2.
2.3.3.
2.3.4.
2.3.5.
2.3.6.
2.3.7.
24
24
25
27
27
28
2.4.
3.
Investment Regime and Arbitration
Regulatory Reforms
Public – Private Partnerships/IPDF
SME Program/SMEDA
Special Economic Zones (SEZ’s)
Privatization
Capital Market Development and Corporate
Governance
Inauguration Schedule
29
31
INVESTMENT PROTECTION
32
3.1
3.2
32
34
International Law
Domestic Pakistani Law
3.2.1 Foreign Investment Legislation
34
3.2.2 Facilitating Commercial Arbitration
36
3.2 3 Strengthening the Judiciary in the Commercial Area 37
4.
FOREIGN INVESTMENT PROMOTION POLICY
39
4.1.
4.2.
4.3.
Scope
FDI Targets and FDI Potential of Pakistan
Enhancing Pakistan’s Image as an Investment
Location
39
39
4.3.1.
4.3.2.
4.3.3.
4.3.4.
4.3.5.
41
42
42
42
43
4.4.
Message
Focal Sectors
Targeted Investor Communities
Channels and Instruments of Communication
Action Plan
Promoting Investment Projects
2
41
43
4.5.
5.
4.4.1. Database
4.4.2. Investment Generation Campaign
4.4.3. Action Plan
43
44
44
Investor Services
45
4.5.1.
4.5.2.
4.5.3.
4.5.4.
45
45
46
46
Scope
“One Window”
Initial Priorities
Action Plan
BUILDING ADMINISTRATIVE CAPACITIES
5.1.
Building a Co-operative Network
5.1.1. Purposes
5.1.2. Overcoming Jurisdictional Constraints
5.1.3. Maximizing Administrative Efficiency
5.1.4. Members of the Co-operative Network
5.2.
Upgrading BOI’s Administrative Capacities
5.2.1. Information Technology
5.2.2. Human Resources
5.2.3. Action Plan
6.
FINANCING
6.1.
6.2.
6.3.
6.4.
6.5.
Need for Increased Funds
Self-financing
Donor Support
Phasing in of Activities
Action Plan
47
47
47
48
48
49
49
49
50
51
51
51
52
52
52
ANNEXURES
Annex 1
54
Annex 2
60
Annex 3
64
EXECUTIVE SUMMARY
In August 2007, the Parliament of Pakistan adopted Vision 2030. Vision 2030 lays
down the national consensus on the major challenges faced by Pakistan in the years
to come and outlines the approaches to meet the challenges. By 2030, Pakistan’s
population will have increased to some 230 to 260 million people, 60% of whom will
live in urban areas. To accommodate basic needs, alleviate poverty and generate
employment for this growing population, GDP growth will have to average some 7%
to 8% per year. In Pakistan’s resource-constraint economy, private investments in
productive ventures have to be the prime engine of such growth. Meeting the
challenges of the future thus depends on Pakistan’s ability to mobilize private
investment, both domestic and foreign.
Foreign Direct Investment (FDI) will have to play a crucial role in energizing
Pakistan’s economy. Its contribution will not be limited to providing much needed
capital; more important are the non-financial contributions that come along with FDI,
notably:
 Transfer of state of the art technology
 Integration of domestic production into world-wide production and marketing
chains; and
 Linkages with domestic businesses (up and down stream effects).
Recent experience shows that economic growth fueled by foreign private investment
is possible in Pakistan. From 2002 to 2007, economic growth averaged some 7.5 %
per annum; at the same time foreign investment/FDI to Pakistan rose from a
negative/minimal (8.4)/485 million USD 2001-02 to 8.4/5.1 billion USD in 2006-07. In
2007-08 when Pakistan faced major external and internal challenges, net portfolio
investments plummeted to close to nil; FDI, however, remained with 5.15 billion USD
stable at previous year’s peak.
The emphasis on foreign investment is not meant to advocate any privileges of
foreign investors over domestic. Domestic and foreign investors operate and
compete in the same economy. International experience shows that economic
growth is best furthered by creating a business-friendly legal, institutional and
administrative enabling framework for all investments, domestic and foreign alike.
Such a framework should provide a “level playing field” for entrepreneurial activities
where all investments, regardless of origin, are driven by market forces to their most
effective use (optimizing resource allocation efficiency).
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Investment Mobilization and International
Competitiveness
In a globalized world economy, Pakistan’s success in mobilizing private investment,
and in attracting foreign investment in particular, will depend on its competitiveness
as an investment location relative to other countries. Boosting Pakistan’s
international competitiveness from its present 92nd rank on a global scale1 to
somewhere between rank 50 and 60 will be crucial in reaching Pakistan’s growth
targets in general and its FDI targets in particular. Many countries are presently
seeking to improve their competitiveness through comprehensive reform programs.
Pakistan will therefore improve its international competitiveness only if it succeeds
with business-friendly reforms faster, better and more comprehensively than
competitor countries.
The Competitiveness Support Fund (CSF) a joint initiative of the Ministry of Finance,
Government of Pakistan and United States agency for International Development
(USAID) established in 2006 to reposition the Pakistan economy on a globally
competitive footing. In advancing such reforms, the Competitiveness Support Fund
and Board of Investment signed a memorandum of understanding in August 2007 to
cooperate in this endeavor. This Investment Policy was initiated and developed in
this time frame.
Mandate and Position of the BOI
The Board of Investment (“BOI”) was created by Ordinance F.No. 2(1)/2001 to
promote domestic and foreign private investment in Pakistan and thus contribute to
Pakistan’s economic and social development. Towards this end, the BOI was
established as the intermediary of the Government of Pakistan (GOP) between the
public and the private sectors. Its mandate encompasses:
(1)
policy advocacy with a view to promoting business friendly regulatory
reforms that improve the enabling conditions for doing business in
Pakistan;
(2)
investment protection with a view to strengthening investor confidence
in the stability of investment conditions in Pakistan, notably through
concluding international investment agreements;
(3)
investment promotion through attracting foreign investors to Pakistan
by:
a. enhancing the image of Pakistan as an investment location, and
b. attracting foreign private investments into projects in Pakistan;
(4)
investment facilitation at all the stages of the investment cycle, notably
through
1 World Economic Forum, „The Global Competitiveness Report 2007-2008“, p.10
a. acting as an intermediary between private investors and Pakistani
authorities (“one window” or “one stop shop” concept);
b. matching foreign and domestic joint venture partners;
c. promoting public private partnerships; and
(5)
networking and coordinating with public authorities and nongovernmental organizations in Pakistan with a view to implementing a
coherent investment promotion Policy.
The BOI’s mandate approximates that of the most successful investment promotion
agencies in the world which have played a crucial role in achieving private sector
based prosperity in their countries. These agencies notably include the Singapore
Development Board, the Irish Development Authority, the Thailand Board of
Investment and the Malaysian Industrial Development Authority. It is envisaged to
initiate MOUs with some of these agencies in the frame of the capacity building
program under this Investment Policy (see ch. 5 below).
The BOI Ordinance has established the BOI as an executive board under the chair of
the Prime Minister and with the Ministers for Privatization & Investment, Finance &
Economic Affairs, Industry & Production as ex officio – members (see Art. 3 of the
BOI Ordinance). While never formally abolished, this structure has fallen into
oblivion, and the BOI in fact is operating as an agency under the Ministry of
Investment & Privatization.
This Investment Policy outlines a conceptual framework for cooperation of economic
actors in Pakistan, public and private sectors, towards mobilizing the Private
Investments, domestic and foreign, direct and portfolio that are required to achieve
Pakistan’s economic targets. Short- and medium-term targets are found in Pakistan’s
Medium-Term Development Framework 2005-2010 (“PMTDF”); and long-term
targets are set out in “Vision 2030”. Both documents reflect a national suprapartisan consensus on Pakistan’s medium- and long-term economic exigencies and
resultant development objectives. This Investment Policy is linked to the PMTDF and
Vision 2030; and it is presented as an integral part of Pakistan’s economic
development Policy.
The following targets are highlighted for the purposes of this Investment Policy:
 Average growth rate of some 7 – 8 % per year
 Employment for an increasing and increasingly urbanized population, (230 –
260 million by 2030)
 Financing Pakistani infrastructure development ($ 39 billion until 2010 and $
41 trillion until 2030)
 Building a knowledge – based economy
 Enhancing the global competitiveness of the Pakistani economy from the
present rank 92 (out of 131 benchmarked countries to rank 50 by 2030.
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Towards these targets, this Investment Policy foresees four action programs, namely
to:
(1) Institutionalize a structured Public – Private Policy Dialogue
(2) Strengthen Investment Protection
(3) Launch a Foreign Investment Promotion Policy; and
(4) Build a Co-operative Network and Administrative Capacities.
These four programs are envisaged to become interdependent and mutually
supportive parts of an overarching coherent Investment Policy.
This Investment Policy cannot be implemented by the BOI alone. Its success
requires the collaboration of all actors in developing Pakistan’s Private Sector. The
BOI will play a catalytic role with the aim of facilitating and energizing this
collaboration. Accordingly, this Investment Policy is designed as a framework of
cooperation of all stakeholders, public and private, in its success. This framework
should meet with broad consensus of Pakistan’s civil society beyond political
divisions; and all stakeholders should “co-own” this Investment Policy and feel
committed to its success in their own interest.
As a framework for cooperation, this Investment Policy has been designed with a
view to avoiding any interference with competencies of ministries and agencies of
the GoP or the Provinces; and all activities envisaged to be carried out by the BOI
are covered by the latter’s mandate under article 9 of the 2001 BOI Ordinance.
As a framework for cooperation also, this Investment Policy is not a business plan. It
rather envisages that specific action plans be determined in public – private sector
consultations under each chapter of the Policy.
To invite broad consensus, this Investment Policy will first be circulated to public and
private organizations involved in the topic for comments; thereafter it will be
discussed with these organizations in a seminar; then it will revised in the light of
these consultations; and finally it will be submitted to the Economic Co-ordination
Committee (ECC) of the Cabinet for its approval. The Investment Policy is
anticipated to become operational in early 2009.
Public – Private Policy Dialogue (“PPPD”)
A three - tiers structured Public – Private Policy Dialogue (“PPPD”) will provide a
platform for systematic consultations between private sector representatives and
GoP/Provincial authorities; it will generate reform proposals from the Private Sector;
and it will identify reform priorities.
The PPPD will have:
 At the bottom Sector Advisory Boards as the primary frame for policy
consultations;
 At the centre a Steering Committee which manages the process; and
 At the top the ECC from which the PPPD will derive its political authority.
Steering Committee and Advisory Boards will be joint public – private sector bodies.
The Steering Committee will be chaired by the Minister in charge of Investments and
include as ex officio – members the Secretaries of the Ministries of Finance,
Industries and Production, Commerce and Law/Justice/HR , the Secretaries of the
BOI and the Planning Commission , the Chief Secretaries of the Provinces and the
CEO of CSF. Private Sector ex officio – members will comprise the Presidents of the
PBC, the FPCCI, the PBIPA and the OICCI as well as the Private Sector Cochairmen of the Advisory Boards. Additional private or public sector representatives
may be invited for the discussion of particular topics.
The Advisory Boards will be co-chaired by the Secretary of the BOI and a Private
Sector Representative.
The Steering Committee will:
 Constitute Sector Advisory Boards and determine their procedures and
composition;
 Review the reports and take action on recommendations from these Boards;
 Monitor the progress of the PPPD and, especially, the follow-up on
recommendations by the ministries and agencies in charge; and
 Report periodically, and at least quarterly, to the ECC.
The Steering Committee may also, on a case-by-case basis, set up ad hoc-expert
groups on horizontal reform initiatives on such topics as Investment Protection.
Recommendations for policy initiatives or resolving problems will primarily be
generated in the Advisory Boards; and they will normally be referred to the ministry
or other agency in charge with the request of reporting back on the action taken.
Important recommendations may also be brought to the immediate attention of the
Steering Committee. The Advisory Boards will report to the Steering Committee on
the results of every meeting, including the recommendations made and the follow-up
thereon.
The reports of the Steering Committee and the Advisory Boards will be circulated to
all members of Committee or Board concerned. This will ensure transparency of the
process and stimulate prompt follow-up actions.
The PPPD will only pass recommendations which will not be binding on political
decision-makers. Nevertheless, its recommendations are expected to carry political
weight by virtue of the combined effect of:
 the composition of the Steering Committee and Advisory Boards which will
back up the recommendations by the supra-partisan consensus of the key
actors, public and private, in the area concerned;
 the reporting system which will ensure transparency of the process and ease
tracing any bottlenecks; and
8
 direct attention to the PPPD by the Cabinet via the ECC.
The PPPD will directly involve the Private Sector in developing Pakistan’s economic
policies. The Private Sector tends to focus on economic exigencies and dynamics
rather than on political agendas. Its involvement is hence likely to “depoliticize”
economic management of Pakistan and broaden support for necessary measures.
Private Sector representatives tend to concentrate on the particular interests and
exigencies of their business or business groups. In the PPPD, consultations with
different interest groups will be brought under one umbrella. Particular individual or
group interests will thus be vetted against competing interests of others as well as
against Pakistan’s (budgetary and other) constraints.
All information from the Sector Advisory Boards will flow together in the Steering
Committee which will thus become a clearing house of GoP/Private Sector
consultations for Pakistan’s main sectors. This will enable the Steering Committee to
contribute to the overall consistency and coherence of the policies, programs and
activities of the GoP, the Provinces and municipalities.
This Investment Policy furthermore envisages that all consultations between the GoP
and the Private Sector be linked to the PPPD. In this way, the various Private Sector
proposals will be brought together on a common platform; conflicts and
inconsistencies will be revealed; priorities will become apparent; and the coherence
of the GoP’s reform agenda will be supported.
In principle, all policy domains that have potential impacts on the risks and/or returns
of private investments should be related to and followed under the PPPD. Such an
endeavor would, however, overstretch the initial capacities of the PPPD. It is
therefore envisaged that the PPPD will initially concentrate on supporting GoP
programs with respect to Investment Protection and Arbitration; Regulatory Reforms
(cutting red tape impeding Private Sector Development), Public – Private
Partnerships/IPDF; Supporting SME’s/SMEDA; creating a uniform enabling
framework for Special Economic Zones; Privatization together with attendant
regulatory policies; and Capital Market Development with a view to easing the
access of the Private Sector (and notably SMEs) to finance.
The envisaged PPPD has been inspired by the so-called “YOIKK Reform Process” in
Turkey which since 2001 has facilitated broad public – private sector consensus on
an impressive reform program and thus contributed to Turkey’s unprecedented
economic stability and growth over the past seven years.
It should finally be noted that the PPPD in all respects will operate within the
parameters of the BOI’s mandate under the 2001 BOI Ordinance (see BOI
Ordinance, Art. 9 a, b, c, e, g, h, k, m, p). With the PPPD, the BOI just seeks the
consensus and cooperation of the Private Sector in carrying out its mandate – in line
with the spirit of the BOI Ordinance (see Art. 9 n).
Investment Protection
Pakistan is consistently poorly rated on international indices related to Investment
Protection, notably on the protection of contracts (154th out of 178 countries)), of
property rights (92/131), and on the proper functioning of the legal system (90/131).
Remedying these ratings is in the best interest of Pakistan since they cause
investors to ask for higher returns on investments in Pakistan (“risk premium”) or to
shy away from Pakistan altogether. Inadequate investment protection not only
adversely impacts on foreign investors; it can also stimulate capital flight on the part
of domestic investors.
Investments in Pakistan are protected under both international and domestic
Pakistani law. Investors tend to give more credit to protections under international
law, as these cannot be abrogated by future changes of Pakistani legislation and can
normally be invoked through international arbitration.
Pakistan’s protections under international law are primarily based on Bilateral
Investment Treaties (“BITs”) of which 26 are in force, 21 signed but not ratified , and
further 21 under negotiations (including United States). Having evolved over the past
50 years, Pakistan’s BITs read quite differently, with considerable legal uncertainty
as a consequence. A revised Model BIT is presently awaiting Cabinet approval.
Investment protection is furthermore offered by the World Bank’s MIGA and
investment guarantee and export credit insurance schemes of industrial countries.
Though potentially highly attractive, the actual contribution of these schemes to
alleviating investors concerns about risks in Pakistan, depends on the terms and
conditions and underwriting practices of the schemes with respect to Pakistan.
Pakistan’s domestic legislation is relatively favorable to foreign investors. Although
the basic “Foreign Private Investment (Promotion and Protection) Act” of 1976 falls
short of international standards, it is complemented by the “Protection of Economic
Reforms Act” of 1992 with strong protections and privileges for foreign investors in
Pakistan (without superseding the flawed regime of the 1976 Act, though). Pakistan
sector and general legislation contains only few limitations for foreign investors and
provides some important incentives to both domestic and foreign investors.
A clear deficit in Pakistan is the lack of commercial arbitration centers and a state-ofthe art enabling legislative framework for commercial arbitration.
10
Under this Investment Policy, the BOI, in cooperation with the MoLJHR, will take and
support actions towards strengthening Investment Protection in Pakistan under both
international and domestic law.
As regards international law, Pakistan’s position in BIT negotiations will be reviewed,
the suitability of project agreements for larger projects be explored, the underwriting
practices of MIGA and national investment guarantee/export credit insurance
agencies with respect to Pakistan be ascertained, and the feasibility of combining
various protection instruments into security packages be explored.
As regards domestic law, initiatives of the MoLHR will be supported towards a
modern Law on Commercial Arbitration, the creation of dispute resolution centers in
Pakistan’s commercial centers, starting with Karachi and Lahore, and the
concentration of jurisdiction over the enforceability of arbitral awards in Pakistan in
specialized chambers in the civil courts in Karachi and Lahore.
Foreign Investment Promotion Policy (“FIPS”)
To attract FDI to Pakistan above the $ 5 billion level first reached in 2006-07 and
defended in 2007-08 despite extraordinary challenges, a Foreign Investment
Promotion Policy (“FIPS”) will be launched. This Policy will encompass three
actions programs:
(1) Enhancing the international Image of Pakistan as an Investment Location;
(2) Promoting Investment Projects in Pakistan internationally; and
(3) Providing Services to (potential and actual) Foreign Investors in Pakistan.
These three action programs will be designed as interdependent and mutually
supportive components of a coherent Investment Promotion Cycle. Investment
promotion activities of other Pakistani agencies (notably PC, IPDF, SMEDA and
PPIB) will be coordinated with the FIPS with a view to maximizing synergies and
sending a coherent message about Pakistan to the international investor community.
The FIPS will largely rely on the comparative assessment of the strengths and
weaknesses of Pakistani sectors presently undertaken by McKinsey Consultants with
the support of the ADB and forthcoming in August/September 2008 (“Business Plan
National Trade Corridor – Related) and other sector studies available. Subject to
these studies, initial focal sectors will be agriculture, manufacturing, textiles, diary, oil
& gas, infrastructure, construction, mining, power, automotive, light engineering,
cement and IT. Initially, efforts will chiefly target 3 regions which account for 61.5.%
of all FDI to Pakistan – United States, EU (mainly UK, NL) and Middle East (UAE &
KSA) – plus high-potential China & Far East. Special attention will be given to the
Pakistan Diasporas in these regions.
A pro-active image enhancement campaign will be launched building on Pakistan’s
strengths (low asset valuation, high profit potential, etc.) and alleviating adverse
(risk) perceptions. Pending reforms and developments that will improve conditions in
Pakistan will be highlighted. An overriding country theme will be developed
encapsulating the best credible prospects/risks mix. The campaign will primarily be
launched through a “Co-operative Network” (see pg 12), presentations at
international conferences and on the occasion of state visits as well as the
organization of investor conferences (Karachi, USA, KSA, UK). Promotional
materials are already disseminated by the BOI (Investor Guide, CDROM,
Newsletter); and the BOI website will become the prime portal.
Investment projects in Pakistan will be promoted in the target regions through a cycle
of activities from targeting potential investors for specific projects, raising their
interest to persuading them to invest. A comprehensive database will be set up and
constantly updated as the backbone of project promotion. It will include project
profiles, information disseminators, target investors, and information tracking investor
contacts. An investment generation campaign in the target regions will be launched
with “marketing letters” to short-listed target companies, investor conferences, visits
in target investor countries, and organizing visits of foreign investor delegations to
Pakistan.
Services will be provided to foreign investors at all stages of the investment cycle
with the aim of converting an initial interest into an actual investment (pre-investment
services) and of encouraging existing investors in Pakistan to expand their
investment (after-care services). Ideally, the BOI would operate as “one window”
mediating all administrative processes between foreign investors and Pakistan
authorities (see Art. 9 (f) of the BOI Ordinance): While such a role across the board
would exceed the BOI’s capacities, one window – operations will be tested in SEZs
under the proposed framework (see above).
Investor Services will be expanded gradually in tandem with building the BOI’s
administrative capacities in the various commercial centers. Karachi will be used as
the lead operation. Initially, priority will be given to preparing “development
packages” for investment projects, negotiating roadmaps with local authorities for
navigating investors through business establishment procedures; establishing “one
window” in SEZs; and facilitating the resolution of problem between foreign investors
and Pakistan authorities.
Building Administrative Capacities and Financing
To develop the capacities needed for implementing this Investment Policy, the BOI
will:
 Build a Co-operative Network of organizations, public and private, Pakistani
and foreign, that will join forces to carry out the activities under this
Investment Policy and notably the FIPS; and
 Upgrade its administrative capacities.
The Co-operative Network will serve to:
 Overcome jurisdictional constraints; and
 Utilize existing administrative capacities rather than build new.
It will include:
 Pakistani agencies at the federal, provincial and municipal levels with
investment-related responsibilities;
 Pakistan embassies and honorary investment counselors, especially in the
focal regions; and
12
 Business organizations in Pakistan and focal investor regions.
In upgrading its capacities to the level needed for implementing this Investment
Policy, the BOI will concentrate on:
 Setting up a dynamic interactive IT System with a Customer Relationship
Management (CRM) and a Client Tracking System(CTS); and
 Developing the requisite Human Resources.
In building its capacities, the BOI will seek the advice of an advanced, well
functioning investment agency with a similar mandate as the BOI, such as the
Singapore or Malaysia Economic Development Board.
While the Co-operative Network will last but not least be developed with a view to
keeping expenses to a minimum, financial resources in addition to the BOI’s present
budget will have to be mobilized to make this Investment Policy a success. Levying
charges on investors is not an option at this stage, although charges for some
specialized Investor Services might become possible once the BOI has
demonstrated its usefulness. In view of Pakistan’s fiscal constraints and in line with
precedents elsewhere, donor support will be sought to cover the financing gap for
implementing this Investment Policy.
Once this Investment Policy is approved, potential donors will be contacted on the
prospects of an Investment Policy Support Project. In view of the lead times of
international donors in conceptualizing, negotiating and approving new projects, such
a project would, however, at best become disbursable in the last year of this
Investment Policy; and it probably would have to cover the subsequent Investment
Policy 2010 – 2015. Discussions will therefore be assumed with potential donors on
whether and how some support can be mobilized for carrying out this Investment
Policy from early 2009 onwards. Some initial support will be requested from the CSF
under the latter’s MOU with the BOI; the CSF has already supported the preparation
of this Investment Policy.
ABBREVIATIONS
ADB
Asian Development Bank
AEDB
Alternate Energy Development Board
BITs
Bilateral Investment Treaties
BOI
Board of Investment
ICSID
International Centre for Settlement of Investment Disputes
ECC
Economic Coordination Committee
FIC
Foreign Investor Council
FIAS
Foreign Investment Advisory Service of the World Bank & IFC
FPCCI
Federation of Pakistan Chambers of Commerce & Industry
FDI
Foreign Direct Investment
GDP
Gross Domestic Product
GoP
Government of Pakistan
HR
Human Resources
IPDF
Infrastructure Project Development Facility
IPFF
Infrastructure Project Finance Facility
ID
Investor Documentary
IT
Information Technology
MIGA
Multilateral Investment Guarantee Agency
MOLJHR
Ministry of Law, Justice and Human Rights
MOU
Memorandum of Understanding
OICCI
Overseas Investors Chambers of Commerce & Industry
OPIC
Overseas Pakistan Investors Council
14
PPPD
Public-Private Policy Dialogue
PMTDF
Pakistan Medium Term Development Framework
PBC
Pakistan Business Council
PBIPA
Pakistan Business Industry Promotion Association
PPP
Private-Public Partnership
RIA
Regulatory Impact Assessment
SMEDA
Small and Medium Enterprise Development Authority
SME
Small and Medium - Sized Enterprise
SEZ
Special Economic Zones
USD
United States Dollar
VGF
Viability Gap Funding
1.
Objective and Approach of Investment Policy
This Investment Policy sets out a roadmap towards mobilizing the amounts of private
investments, domestic and foreign, needed to accomplish the targets of Vision 2030
in general and in particular:
 achieving average growth rate of some 7% to 8% per year;
 generating employment needed for an increasing and increasingly urbanized
population;
 building a knowledge based economy; and
 enhancing the global competitiveness of Pakistan’s economy from the
present rank 92 (out of 131 benchmarked countries) to rank 50 by 2030 in
accordance with the action plan of the Competitiveness Support Fund.
Towards this end, FDI targets will be determined in the implementation of this
Investment Policy.
This Investment Policy is designed as an integral part of Pakistan’s overall economic
development Policy; and it is directly linked with Pakistan’s Medium-term
Development Framework 2005-2010 (PMDF)2. Accordingly, it covers a three year
horizon, thus coinciding with the remaining duration of the PMDF. Subsequent
investment strategies will stretch over five year horizons in tandem with subsequent
PMDFs.
This Investment Policy sets out targets to be achieved, outlines lines of activities of
the BOI in pursuit of these targets and addresses the capacity building challenges for
carrying out envisaged activities.
During 2008 -09, detailed action plans will be developed in close consultation with
Government authorities and private sector representatives on each line of envisaged
activities.
The following lines of activities are foreseen in this Investment Policy:
(1) Institutionalizing a structured Public - Private Policy Dialogue (ch.2
below);
(2) Linking this Investment Policy with reforms in related policy areas towards
a coherent private sector policy framework (ch.3 below);
(3) Strengthening Investment Protection (ch. 4 below);
2 This Investment Policy will furthermore be linked to the 2008 CSF paper on“Interventions and Inputs with Line Ministries of the Government of
Pakistan: Upgrading the Competitiveness of Pakistan’s Economy to Respond to New Challenges and Opportunities in the Knowledge Based
Economy”. This paper provides a comprehensive checklist of recommended short-term actions by some 20 Government agencies with
investment-related responsibilities as well as provincial and local governments, private business and civil society organizations.
The implementation of this Investment Policy will also benefit from the “Business Plan National Trade Corridor- Related”, an in depth-multisector study under preparation by the Planning Commission with the support of the ADB.
16
(4) Promoting Foreign Direct Investment to Pakistan through (ch. 5 below)
a. Enhancing internationally the image of Pakistan as an investment
location (ch. 5.1);
b. Internationally promoting investment projects in Pakistan (ch. 5.2);
c. Providing a variety of services to foreign investors at all stages of
the investment cycle (ch. 5.3);
(5) Building Cooperative Networks and the necessary administrative
capacities to implement this Investment Policy (ch. 6); and
(6) Mobilizing the necessary financing for building the aforementioned
capacities (ch. 7).
The above lines of activities are envisaged to become building blocks of interindependent action program where activities in one area supplement and reinforce
activities in other areas.
The successful implementation of this Investment Policy will require considerable
administrative capacities with attendant budgetary implications. Activities will
therefore be gradually phased in tandem with progress in building the necessary
capacities.
In view of the present challenges faced by Pakistan, priority will be given to:
 Institutionalizing the Public- Private Policy Dialogue with a view to setting
the stage for a stable and consistent investment-friendly reform process; and
 Strengthening Investment Protection with a view of facilitating vital projects,
notably in infrastructure and energy.
Implementing this Investment Policy requires the collaboration of all actors in
developing Pakistan’s private sector. The BOI will play a catalytic role in this context
with the aim of facilitating, energizing and coordinating this collaboration.
Accordingly, this Investment Policy is proposed as a blueprint for cooperation of all
stakeholders, public and private, in pursuit of Pakistan’s economic growth targets. It
is therefore essential that this Investment Policy reflects a broad consensus of these
stakeholders. Ideally, all stakeholders should “co-own” this Investment Policy and
feel committed to its implementation in their own interest.
Towards this end, this Investment Policy will be disseminated in early August 2008
as a draft to the public and private organizations called upon for its implementation
for their comments by mid September. A draft revised in light of these comments will
then be circulated by end September 2008 and discussed in a seminar in Karachi in
mid-October. Thereafter, the draft (as revised again) will be submitted to the Cabinet.
Cabinet approval is anticipated By December 2008. Once the Investment Policy is
adopted, the Steering Committee under the proposed Public – Private Policy
Dialogue (see. ch. 2 below) will in early 2009 set up the operational structure of the
Dialogue. Action plan for a Foreign Investment Promotion Policy will already be
prepared while the above process is pending. Even after its adoption, this
Investment Policy will remain a “living document”, i.e., progress in its implementation
will be monitored jointly with cooperating organizations and the Policy stands to be
amended in the light of experience and resource mobilization whenever deemed
expedient.
18
2.
2.1
PUBLIC-PRIVATE POLICY DIALOGUE (PPPD)
Purposes
A structured Dialogue with the Private Sector will be the backbone of this Investment
Policy. This Dialogue will provide a platform for a systematic exchange of
information between private sector representatives and government authorities; it will
generate reform proposals from the private sector; and it will help identify reform
priorities.
The Private Sector is driven by economic exigencies and dynamics. A structured
Dialogue with the Private Sector is expected to help focus policy-makers across
party lines on economic challenges faced by Pakistan and measures required to
meet these challenges. This is expected to “depoliticize” economic management of
Pakistan and broaden political support for necessary measures.
As envisaged, the Dialogue will involve the Private Sector in the development and
pursuit of the GoP’s investment mobilization agenda in all its stages. It will thus
inspire a sense of co-ownership, public and private, in the agenda and in this way
commit all stakeholders to their implementation.
If consulted informally, private sector representatives tend to articulate just particular
interests of individual enterprises or business groups. By bringing the various
consultations with different Private Sector interest groups under one umbrella in a
structured process (see ch. 2.3 below), particular individual or group interests will be
vetted against competing interests of others a s well as Pakistan ’s (budgetary and
other) constraints. Conflicting interest and exigencies will thus be revealed and
balanced policy conclusions furthered.
Through the Dialogue, actors in various sectors and policy domains will exchange
information on developments, problems and initiatives. This will contribute to the
overall consistency and coherence of private sector – related policies, programs and
activities.
The consultation process will require responsible authorities periodically to report
back on actions taken on reform proposals made by the Private Sector. This is
expected to ensure proper follow-up on reform proposals and thus energize the
reform process.
Finally, through the Private Sector dialogue the BOI stands to obtain the necessary
in-depth information for enhancing Pakistan’s image as an investment location,
promoting investment opportunities and rejuvenating investor service programs.
These activities require realistic assessments of the various sectors’ comparative
strengths, risks and weaknesses; they include the identification of both “marketable”
investment projects as well as potential investors abroad that might be interested in
those opportunities. For all these activities, the BOI will need the on-going advice
and feedback of the private sector. The PPPD is envisaged to provide the framework
for this interaction between the Private Sector and the BOI.
2.2 Structure and Modus Operandi
The PPPD will be a consultative process; it will not have regulatory or executive
powers. It will generate policy recommendations, but it will not have authority to force
its recommendations on political decision-makers3. This begs the question of the
potential effectiveness of the PPPD.
Indeed, the success and even the relevance of the PPPD will depend on its ability to:
 Mobilize and maintain the co-operation of all actors in the process (GoP
ministries and agencies, Provinces, Private Sector leaders);
 Ensure appropriate and timely follow-up actions on the recommendations
made under the PPPD; and
 Give political weight to its recommendations.
This ability in turn will require:
 a structured process that by virtue of its inherent dynamics generates
incentives and pressures towards co-operation and follow-up; and
 a competent, consistent management of the process that keeps it alive and
effective.
The structure and modus operandi of the PPPD below is proposed with a view to
these challenges.
The PPPD will have a 3-tier structure:
 at the centre a Steering Committee which manages the process;
 at the bottom Advisory Boards where substantive consultations take place
and recommendations are generated; and
 at the top the Economic Co-operation Committee of the Cabinet (ECC)
which ensures highest level political attention to the results of the PPPD
process.
3 A PPPD with decision-making authority or enforcement powers would probably not fit in the governance structure of the GOP (see….); at the
very least, it would have to be established by legislation.
20
Figure 1 below shows the structure of the PPPD.
Steering Committee
The Steering Committee will comprise representatives of both the Public and the
Private Sector. It will be chaired by the Minister in charge of Investments. Regular
Public Sector members will initially be the Secretaries of the Ministries
of Finance, Commerce, Industries & Production, Law/Justice/Human Rights, the BOI
/ID, the Planning Commission and the FBR as well as the Chief Secretaries of the
Provinces and the CEO of CSF. Representatives of additional ministries or agencies
may be invited by the Chairman to meetings discussing topics of their interest.
Regular Private Sector members will initially be the Chairman of Pakistan Business
Council (PBC), the Federation of Pakistan Chambers of Commerce &
Industry (FPCCI), the Pakistan Business and Industry Promotion Association
(PBIPA) and the Overseas Investors Chamber of Commerce & Industry (OICCI) as
well as the Private Sector Co-chairmen of the Advisory Boards (see below).
The Steering Committee will manage the PPPD process. It will in particular:
 constitute Sector Advisory Boards;
 review the reports and take action on recommendations from these Boards;
 monitor the progress of the PPPD and, especially, the follow-up on
recommendations by the ministries and agencies in charge;
 report periodically, and at least quarterly, to the ECC.
The Steering Committee will initially meet monthly to put the PPPD process into
operation. Thereafter, it will meet at least quarterly. The Chairman may call in
additional meetings in his discretion.
In the interim, the PPPD process will be managed by the Secretariat of the
Steering Committee. The Secretariat will be provided by the BOI and operate
under the authority of the Committee Chairman.
Sector Advisory Boards
Substantive consultations will primarily be pursued in the frame of sector – specific
Advisory Boards4. In November 2007, such Boards have been created for the
power, oil and gas, mining, agriculture, construction and automotive sectors.
Additional Advisory Boards may be constituted by the Steering Committee on such
sectors as textiles, telecom, jewelry, fisheries. The composition, modus operandi and
meeting schedule of the Advisory Boards will be determined by the Steering
Committee. It is envisaged that Advisory Boards will meet bi- monthly or whenever
convened by the Chairman for a particular reason. The Advisory Boards will be cochaired by the Secretary of the BOI and a Private Sector representative.
4 Compare art. 9(b) of the BOI Ordinance under which the BOI shall “initiate and consider sectoral investment proposals and categories of
investment which may require specific treatment and propose such sectoral incentives or conditions or criteria requiring rationalization of
existing policies ”
22
The Steering Committee may, either on its own initiative or on a proposal from an
Advisory Board, also constitute ad hoc-Expert Groups on particular reform topics
cutting across sectors. Such Groups will normally include both public and private
sector experts, and they will be chaired by the lead ministry/agency for the topic
concerned. Their assignment and modus operandi will be determined by the
Steering Committee, and the Group will submit its conclusions/recommendations to
the latter which will determine the follow-up, if any.5
Proposals made in Advisory Boards will normally be referred to the ministry or
other authority in charge of the subject matter with a request to report back to the
Advisory Board within a specified period of time on its follow-up action. However,
where a proposal has implications beyond a particular sector (horizontal policy
proposal) or is otherwise considered as especially important, it will be referred to the
Steering Committee for its decision on the most suitable follow-up action. The
Steering Committee may, for instance, refer such a proposal to the lead ministry or
agency in charge; it may refer the proposal to the RIA unit (if created, see pg 24) for
a (preliminary) regulatory impact assessment; it may convene an ad-hoc expert
group on a particularly complex proposal (e.g., investment protection and
commercial arbitration); or it may refer an important proposal to the Economic
Coordination Committee (ECC) for its consideration (usually after having obtained a
provisional) RIA).
Reporting System
A formalized reporting system will ensure the transparency of the PPPD and attract
the attention of political decision-makers.
The Advisory Boards will send summary reports on each meeting to the Steering
Committee. These reports will include the (notably Private Sector) proposals made in
meetings as well as the follow-up on previous proposals. The Steering Committee
will report at least quarterly to the ECC on the progress of the PPPD, including major
reform proposals and the follow-up thereon. Such reports will be disseminated to all
members of the Steering Committee and the Advisory Board concerned, including
the Private Sector members. This system will allow all members to trace the followup on proposals made; and it is expected to stimulate prompt resonse of responsible
ministries and agencies on proposals referred to them.
Review
The above structure and modus operandi were inspired by the Turkish “YOIKK
Reform Process“6, although they were attuned to the conditions prevailing in
Pakistan. The above structure and operating procedures will be reviewed in 2009-10
with a view to introducing whatever changes might be warranted in the light of
experience to enhance efficiency and effectiveness of the PPPD.
5 Compare art.9 (k) of the BOI Ordinance under which the BOI shall appoint commissions, expert bodies, and consultant to study various
aspects of attracting investment in all sectors and improving the investment climate, procedures and other related matters.
6 This process refers to the „Reform programme for t he Improvement of the Investment Climate in Turkey“ launched by the Turkish Cabinet in
Dec.2001 and still in operation. In the frame of this Programme, a structured public-private policy dialogue was created with a 3-tiers structure:
at the top an Inter ministerial Committee chaired by the State Minister for Economy, the “YOIKK” (“Türkiye’de Yatirim Ortaminin Iyilestirilmesi
Reform Programi”), There under a Steering Committee (added in 2005) under the Secretary of Treasury, and There under 10 “Technical
Committees” on such topics as Investment Promotion, SMEs, Taxes & Incentives. The dialogue has facilitated an impressive reform program
which brought Turkey 6.8% annual economic growth fuelled by a steady increase of FDI to unprecedented levels (from $1.1bn in 2001 to some
$22 bn in 2007). See HAzine/BMWi, (authors: Voss/Murphy), “Towards Improving the Investment Climate in Turkey: Comments on the YOIKK
Reform Process”, Ankara (Hazine) 2006
2.3
Umbrella Function
The PPPD will consolidate all policy consultations between GOP agencies and the
Private Sector in one framework. It will thus help avoid duplication of
consultations. More importantly, it will bring together the various private sector
investor proposals on a common platform, thus reveal conflicts and inconsistencies
between various proposals and help determine priorities. In this way, the Dialogue is
expected to further the coherence of the reform agenda.
Since investment decisions are driven by the (perceived) risk/return – ratio, in
principle all policy areas that can have an influence on risks and returns of
investments are related to an investment Policy.7 Bringing all such policy areas
upfront in the frame of this Investment Policy, however, would make it
unmanageable. This Investment Policy therefore concentrates on the links with GoP
programs directly serving its objective. Accordingly, the following Private Sector
development programs of the GOP will initially be supported by the PPPD:
2.3.1 Investment Protection and Arbitration
The legal protection of private investments under both international and domestic law
and the role of arbitration in this context is key to encouraging notably foreign private
investments. Effective investment protection is especially important in Pakistan to
counter adverse risk perceptions (whether justified or not) in the international
investor community. A pro-active reform program will be initiated and supported
under the PPPD. Its features are outlined under ch. 3 below.
2.3. 2
Regulatory Reforms
Due to reforms since the late 1990s, Pakistan’s regulatory framework has become
more business-friendly in recent years. The World Bank Report 2008 on “The Ease
of Doing Business” places Pakistan at the 76th position out of 178 countries
worldwide. In the context of South Asia, Pakistan is second only to the Maldives and
far ahead of India, Bangladesh, Sri Lanka and China. Nonetheless, much needs still
to be done towards enhancing Pakistan’s investment climate; and the GoP with new
vigor is committed to cutting red tape and rationalizing business regulations.
Several reports have been prepared on deficiencies of business regulations in
Pakistan, most notably a 2006 “Review of Administrative Barriers to Investment in
Pakistan” by the Foreign Investment Advisory Service of the World Bank and the
International Finance Corporation (the “FIAS Study”). In September 2006, the GoP
has started a regulatory reform process aimed at easing administrative and other
(tax) barriers for investments in Pakistan.
The BOI will pro-actively support the regulatory reform process under its policy
advocacy mandate.8 The PPPD in particular will serve as a frame for systematic
consultations on regulatory reforms between the GoP and the Private Sector where
reform proposals are canvassed from the Private Sector and referred to the
7 The 2006 „Policy Framework for Investments“ of the OECD(“PFI”) encompasses 10 broadly defined policy domains, viz.: Trade policy,
competition policy, investment promotion and facilitation, tax policy, corporate governance, corporate responsibility and market integrity, public
governance, infrastructure development, human resource development
8 See especially art. 9 (a), (c), and (p) of the BOI Ordinance
24
authorities in charge, planned reform measures are discussed and progress on
reform initiatives is monitored. Moreover, the BOI will internationally disseminate
information on regulatory reforms in the context of its program for enhancing
Pakistan’s image as an investment location (see ch. 5.3 below)
In the frame of the aforementioned regulatory reform initiative, it has been envisaged
to perform systematic “Regulatory Impact Assessments” (“RIA’s”) which analyze the
economic, social and environmental costs and benefits of important regulatory
reforms in accordance with an established methodology. Sophisticated RIA
programs have been launched over the last years in the EU and most EU countries
under the so-called “Lisboan Policy” designed to enhance the international
competitiveness of European economies. As part of these programs, elaborate
techniques have been developed to measure the economic costs of business
regulations and minimize such costs without sacrificing overriding public interests.
While RIAs are normally carried out by the lead ministry for the subject matter
concerned, central RIA units have been created in many countries to provide
methodological guidance to the lead ministries. The United Kingdom, Germany, the
Netherlands and Denmark appear to be the European leaders on RIAs.
An RIA program of the GoP could effectively interact with the PPPD. Provisional
RIAs on reform proposals from the Private Sector could help identify worthy reform
initiatives; and the Private Sector could be used a sounding board aligning RIAs with
business realities.
2.3.3 Private – Public Partnerships/IPDF
Contractual arrangements between public agencies and private enterprises on
sharing responsibilities for public infrastructure projects or public services (privatepublic partnerships or “PPPs”) have worldwide proliferated over the past decades.
Through PPPs, Governments seek to supplement scarce budgetary funds with
private capital and improve management efficiency as well as financial discipline of
public projects. According to GoP estimates, less than half of the infrastructure
investment needs under the 2005-2010 MTDF can be covered by public funds.
Against this background, the GoP since the early 1990s pioneered PPPs for large
energy and telecom projects, starting with the World Bank supported Hub River Dam
project in 1993
In 2006, the GOP, with the assistance of the World Bank and ADB, structured a PPP
program to facilitate PPPs more broadly for improving of infrastructure and providing
public services at all levels of the State (federal, provincial and municipal). This
program includes the creation of:
 a PPP Task Force with senior officials from relevant ministries and provinces
to develop a PPP-friendly policy and regulatory framework;
 the Infrastructure Project Development Facility (“IPDF”) to assist Pakistani
authorities at all levels to develop and facilitate PPP projects; and
 an Infrastructure Project Finance Facility (“IPFF”) to provide “residual” longterm local currency financing not available from the private capital market.
While the IPDF assumed operations in January 2007, the establishment of the IPFF
is still pending. Besides the IPDF, the “Private Power Infrastructure Board” remains
in charge of developing and negotiating mega power projects (over 50 MW); and
the “Alternative Energy Development Board” was established to facilitate renewable
energy projects through PPPs.
In its first 1 1/2 years, the IPDF has published Project Preparation/Feasibility
Guidelines for PPP Projects, Procurement Guidelines for PPP Projects as well as
comprehensive standard clauses for PPP agreements. It is facilitating pilot PPP
projects in priority sectors, notably municipal services, transport and logistics, mass
urban public transportation and small scale energy projects (below 50 MW). The
IPDF moreover is developing a methodology for facilitating the financing of projects
that are economically and socially justified but fall short of financial viability. Such
projects are to receive “viability gap funding” (“VGF”) in the form of outright subsidies
and/or GoP guarantees. A VGF Company will for that purpose be constituted under
the Ministry of Finance.
Thus far, PPP projects are identified by municipalities, provinces or sector agencies
and IPDF intervenes in responsive to requests received . In future, however, it is
envisaged to plan PPPs pro-actively as an integral part of the GoP’s infrastructure
development Policy. Toward this end, a comprehensive “Country PPP Network” is
presently put in place.9
The main constraints for the desirable expansion of PPPs are:
 insufficient debt of the Pakistani capital market (longest debt maturities 10 –
12 years while PPPs have 15 – 25 years amortization periods) ; and
 adverse risk perceptions on the part of foreign investors.
In consonance with the MOU between the BOI and the IPDF, the PPP program will
be supported under this Investment Policy in four ways:
 Consultations on policy initiatives towards a PPP friendly legal and
institutional framework in the frame of the PPPD will bring in the experience
of the Private Sector into the policy planning of the PPP Task Force. Towards
this end, the PPP Task Force/IPD secretariat will participate in the relevant
PPPD Advisory Boards.
 The PPPD (Sector) Advisory Boards will help identify suitable PPP projects
which will then be referred to the IPDF.
 IPDF or the Private Power Infrastructure Board or the Alternative Energy
Development Board or as the case may be will devise security packages for
PPP projects in consultation with BOI, seek coverage from investment and
export credit insurers and thus facilitate foreign investments in PPP projects
(see ch. 3.1 below).
 The BOI will promote foreign investments into PPP projects (see ch. 4
below).
9 Annex 1 provides a more detailed account of the state of and pending plans under Pakistan’s PPP program.
26
2.3.4 SME Program / SMEDA
3.2 million SMEs are the backbone of Pakistan’s economy, constituting 99% of
Pakistani enterprises, generating some 30% Pakistan’s GDP and nearly 78 % of
overall employment in the private sector outside agriculture.
In October 1998, the Small and Medium Enterprise Development Authority
(“SMEDA”) was established under the umbrella of the Ministry of Industry &
Production “for encouraging and facilitating the development and growth of small and
medium enterprises in Pakistan”.10 SMEDA’s broad mandate encompasses
advocating SME-friendly policies, assisting in developing sector strategies,
facilitating SME’s access to finance and business development services – all
activities which closely interface with the mandate of the BOI. It is important to note
in this context that the mandates of both the BOI and SMEDA cover domestic and
foreign investments alike. In 2007, the GoP adopted a comprehensive short- to longterm policy framework for SME development, support and promotion ( “SME Policy
2007 ”)11 .
The BOI and SMEDA, on the basis of their MOU, will co-ordinate their activities so as
to maximize synergies . More specifically:
 Regulatory reforms towards cutting red tape will be advocated under the
PPPD (see pg 19);
 Sector development strategies will be discussed and promoted in the PPPD
Sector Advisory;
 Special efforts will be made to mobilize FDI into suitable medium-sized
Pakistani enterprises. Such efforts will in particular seek to attract foreign joint
venture partners and target Pakistan diasporas abroad. The efforts will
benefit from pre-feasibility studies and business plan developed by SMEDA;
 The BOI’s Investor Services Action Plan (ch. 4.5.4 below) will be coordinated
with SMEDA so as to avoid a duplication of services;
 An action plan towards promoting venture capital in Pakistan will be pursued
under the PPPD in co-operation with the SECP with a view to facilitating
SME’s access to (seed) capital.
2.3.5 Special Economic Zones (SEZ’s )
Special Economic Zones (SEZs) have been, and still are being created, in many
countries as “economic enclaves” with a view to creating conducive conditions for
private sector development in defined geographic areas. More specifically, SEZ’s
serve to facilitate site development; the provision and financing of adequate business
infrastructure; the protection of security of business installations; the alleviation of
regulatory constraints (“administrative enclaves”); the promotion of industry clusters;
and the creation of industrial lighthouses in underdeveloped regions. As successful
10 See Ordinance number No. XXXIX of 2002 (No.F.2.(1)/2002-Pub)
11 See Annex 2 for an account of the activities and accomplishments of SMEDA.
examples in other countries demonstrate12, SEZ’s offer an opportunity of overcoming
investment constraints.
With two noteworthy exceptions, past SEZ initiatives in Pakistan have not been
successful, though. These include the attempts to develop Export Processing Zones
(EPZs) and the now defunct Special Industrial Zones. Previous governments have
initiated Industrial Estates and Industrial Parks in the country to meet challenges of
competitiveness.
At present, the enabling framework of SEZ’s in Pakistan is still anchored in zone-byzone legislation, with attendant deficits in terms of transparency and policy
coherence. Upon a review of international SEZ practices and experiences as well as
an analysis of past SEZ failures in Pakistan, the CSF had in early 2008 submitted a
proposal for developing a uniform policy, legal and institutional framework for SEZs
in Pakistan to be embodied in a framework law on SEZs. The BOI is presently in the
process of submitting this proposal to the ECC for its endorsement.
After the ECC’s endorsement of the proposal in principle, the BOI, in cooperation
with the Ministry of Industries, Production and Special Initiatives, the Ministry of
Finance, the NIPDMC and the CSF will prepare a Policy for formulation of Board of
Approvals to regulate policy framework for SEZs. This policy framework will then be
transformed into a draft law on SEZs. Consultations on the Policy and draft law will
be held in the frame of the PPPD; and a horizontal expert group on SEZs may be
convened under the Steering Committee.
2.3.6
Privatization
Pakistan’s Privatization Program started in 1991 with the establishment of the
Privatization Commission (the “PC”) . The Program was expanded in 2000 with the
creation of the Ministry of Privatization and reconstitution of the PC under that
Ministry by the Privatization Ordinance 2000 (No. F.2(1)/2000-Pub. ). In 2002, the
BOI was positioned under this Ministry which in 2004 was renamed Ministry of
Privatization and Investment.
Since 1991, some 158 enterprises were privatized with privatization proceeds
totaling Rs. 475 million. Privatized enterprises cover over 12 sectors, with Telecom,
Financial Institutions, Energy, Chemical and Cement as the largest. Major
privatizations are still outstanding, notably utilities and oil & gas enterprises. These
privatizations are slowed down by the necessity of establishing suitable regulatory
frameworks beforehand.
While the mode of privatization is determined on a case -by-case basis and includes
public offerings, controlling blocks in state enterprises are preferably sold to strategic
investors, both from Pakistan and abroad. Accordingly, state enterprises are
normally tendered worldwide and
foreign investment into such enterprises is
promoted13 .
Mobilizing private investments, domestic and foreign, for privatizing state enterprises
is an integral part of a comprehensive Investment Policy. In this context, it must be
noted that privatizations, in conjunction with attendant regulatory policies, tend to
influence the framework conditions for doing business in the country (access to
12 See, for instance, China, India, Thailand, Turkey
13 See Annex 3 for an account of the procedures and the accomplishments under the Privatization Program.
28
utilities and financing, competition, etc.) and thus have effects beyond the state
enterprises concerned. Hence:
 The impacts of privatizations, past and (especially) planned, and envisaged
regulatory policies on the various sectors will be discussed in the Sector
Advisory Boards with a view to developing proposals towards maximizing the
economic benefits of privatizations and attendant regulatory policies. Access
of SMEs to finance and utilities as well as a voidance of
monopolies/oligopolies will be important benchmarks.
 The foreign investment promotion activities of the PC will be linked with the
Foreign Investment Promotion Policy (ch. 4 below) with a view to:
•
Ensuring consistency of the country message (ch. 5.3 below); and
•
achieving synergies in project promotion efforts by utilizing
capacities/facilities for both “ greenfield ” and privatization projects (
database , Co-operative Ne twork , investor conferences, etc).
2.3.7 Capital Market Development and Corporate Governance
Remarkable development of financial intermediation through banks and capital
markets has fueled Pakistan’s economic growth during 2000 – 2006. Annual GDP
growth averaging over 5 % during this period was largely facilitated by an expansion
of overall credit in the range of 16% p. a.. Bank credit has grown rapidly, serviced
diverse needs and venture d into new areas such as consumer financing which
stimulated the demand for durables.
Four developments in particular facilitated the development of the financial sector
during the above period:
 the privatization of banks;
 the consolidation of the banking sector
 the strengthening of prudential regulations for the banking industry; and
 the introduction and enforcement of a state of the art – corporate governance
regime.
Due to these accomplishment, Pakistan has outperformed other South Asian
countries on financial sector development, trailing marginally behind India only on
access to finance and efficiency of financial intermediation and topping South Asia
on corporate governance (where it has also achieved a remarkable 19/178 position
on a global scale). The table below reflects the competitiveness of the Pakistani
financial sector in South Asia.
Despite these accomplishments, much remains to be done. More than half of the
credit flows to the large corporate sector, still leaving SMEs without adequate
financing. Infrastructure development in Pakistan, according to estimates under the
PMTDF, requires some $ 39 bn until 2010 and , according to Vision 2030, some $ 41
trillion until 2030. The present capacities of capital markets fall far short of these
needs. Even more serious are maturity constraints. The longest debt maturities
available in the Pakistan capital range between 10-12 years ; and the bulk of credit is
for less than 1-2 years. The recent turbulences in the Pakistan capital markets and
the virtual erosion of foreign portfolio investment finally show the vulnerability of the
Pakistan financial sector. Notably the dearth of a viable venture capital industry in
Pakistan deprives enterprise founders of urgently needed seed capital.
Against this background:
 Consultations will be pursued in the Sector Advisory Boards with the SECP
on further developing the Pakistani financial industry in response to the
financing needs of enterprises, present and prospective, in the various
sectors. Special emphasis will be placed on improving the access of SMEs to
longer-term financing at affordable rates.
 To open the door to seed risk capital for SMEs and enterprise founders, a
special action program towards a viable venture capital industry will be
encouraged and promoted in cooperation with the SECP and SMEDA. This
initiative might benefit from research on this topic by the CSF14 .
14 See Annex 4 for an outline of the CFS proposals and a list of venture capital funding opportunities in the engineering, agricultural, energy
and health/environment sectors in Pakistan.
30
 The program towards enhancing Pakistan’s image as an investment location
(ch. 4.3 below) will target FDI and foreign capital markets alike
2.4.
Inauguration Schedule
The PPPD will become operative in the course of 2008-09. The following steps are
envisaged for its inauguration:
August – mid September 2008:
Comments on draft Investment Policy from GoP ministries / a gencies , Provinces,
business organizations and academic institutions.
October 2008:
Seminar on draft Investment Policy with GoP ministries/agencies, Provinces,
business representatives and academia.
November /December 2008:
Approval of the (revised) Investment Policy by the ECC.
January 2009:
Constituent meeting of the Steering Committee
3.
IMPROVING INVESTMENT PROTECTION
Investment decisions are primarily driven by investors’ perceptions of risks and
returns associated with an investment in a particular country. The higher the risks
perceived, the higher must be the expected returns to compensate for the risks
(risk/return- ratio theorem). These risk/return assessments are made over the entire
life cycle of the investment project, i.e., the period from the planning to the full
recoupment of the investment capital. Depending on the type and sector of the
project, this period may be anywhere between three and thirty years. Effective and
credible investment protection is especially crucial for large investment projects with
long recoupment periods as are typical in infrastructure, power, mining and energy
sectors. The success of the PPP initiative in particular depends on the credibility of
investment protection.
As the life cycle of investment projects usually exceeds legislative periods,
investment protection needs to be insulated from the agendas and fates of individual
governments and parliaments. Towards this end, investment conditions need to be
stabilized independent of whatever political parties happen to rise to power15.
Pakistan is consistently poorly rated on indices related to investment protection16,
notably on the protection of contracts (154th out of 178 countries)17; on the protection
of property rights (92nd out of 131 countries), and on the proper functioning of the
legal system (90th out of 131 countries)18.
Mobilizing private investment and in particular attracting foreign investment therefore
urgently requires affirmative action reinforcing the long-term protection of investment
rights and stability of investment conditions independent of the political process in
the country. Initiatives under both international law and domestic Pakistani law
towards reaffirming investment protection will therefore be pursued in the frame of
this Investment Policy.
3.1
International Law
Pakistan has signed 47 bilateral investment treaties (“BITs”) of which 26 are
presently in force; with further 21 countries, including the United States, negotiations
on such treaties are presently pending19 . BITs, on a reciprocal basis, accord
protections under international law to investors from Contracting States for the
duration of the treaties (usually 10 to 30 years). Automatic renewal and post termination enforceability clauses further extend the protection of such treaties.
These protections override domestic Pakistani law; i.e., they cannot be abrogated by
future changes of domestic Pakistani legislation.
15 Government stability, though more eye-catching, is less important to investors than policy stability. Unfortunately, policy stability in Pakistan
is internationally perceived as even more problematic than Government stability; see World Economic Forum, Global Competitiveness Index
2007-08. p-121. Hence the need for confidence-building action.
16 Investment Protection should not be confused with Investor Protection (where Pakistan is rated remarkably favourable:19/178). While the
latter term refers to corporate governance issues, such as the protection of minority share holders, Investment Protection connotes the
protection of assets contributed into a project and investors’ rights to such assets.
17 World Bank, Doing Business 2008, p.45 et seq
18 World Economic Forum, Global Competitiveness Report 2007-2008, p.122
19 Investment Protection provisions are furthermore found in Pakistan’s Fress Trade Agreements with China, Mauritius and Sri Lanka; and negotiations on
such provisions are pending in the regional cooperation agreements, notably the SAARC and ECO.
32
Pakistan has also ratified the Convention on the Settlement of Investment Disputes
between States and Nationals of Other States of 1966 (the “ICSID Convention”)
which accords foreign investors access to international arbitration to pursue their
rights against the GOP under BITs or investment contracts between individual
foreign investors and GOP authorities. Arbitral awards under the CSID Convention
can be enforced in Pakistan and all 143 Contracting States of the CSID Convention
without review by domestic Pakistani courts. To the extent that foreign investors are
accorded access to international arbitration, the protection of their rights is hence
insulated from the domestic Pakistani judiciary.
Moreover, most industrial countries as well as the World Bank’s Multilateral
Investment Guarantee Agency (MIGA) offer insurance coverage to qualifying
investors against so-called non-commercial risks. Under these coverage’s, investors
can claw back losses in Pakistan from their Governments under their domestic laws,
or in the case of MIGA under international law. Many investment guarantee
systems offer protection against losses from civil strife and armed conflict which in
some cases include so-called business interruption losses.
Most foreign direct investments are moreover made through contribution of capital
goods or know-how of the foreign investor (parent company) into the investment
project which typically takes the form of a subsidiary in the host country. As a result,
foreign investors in most cases are also exporters and in this capacity qualify for
export credits or export credit insurance from their home countries. Export credit
insurance might be superior to investment insurance, as it covers flatly the
insolvency risk of the Pakistani subsidiary, thus encompassing both commercial and
non-commercial risks. Most industrial countries, under their export credit insurance
systems, finally operate so- called project financing windows under which offer
exporters from these countries long-term insurance protection of their rights under
project agreements; against any breaches of project agreements on the part of those
countries.
Thus, it appears in theory to be possible to combine protections accorded under
BITs, investment agreements and investment and/or export credit insurance systems
into security packages that could considerably alleviate investors’ concerns about
political risks in Pakistan. Alleviating risk perceptions would enhance Pakistan’s
competitiveness in attracting foreign investments, especially in large infrastructure,
power, mining and energy projects.
Considerable complexities are faced, however, in establishing credible investment
security in practice.
Pakistan’s BITs were concluded over the past 50 years (1959 first BIT with
Germany) and reflect differing policy positions of the various partner countries.
Different languages of the BITs imply differences in the scope of protection of foreign
investors in Pakistan depending on their country of origin.20 Most but not all BITs
furthermore accord investors access to international arbitration. The complexities of
BITs imply legal uncertainty for both foreign investors and the GoP with an attendant
risk of lengthy and costly arbitral proceedings21. To enhance legal certainty, the GoP
20 The Most Favored Nation Treatment clause embodied in all BITs seems to complicate the matter further. While it seems on the one hand to
add up all treaties to a uniform framework entitling every treaty-protected investor to the maximum protection provided in any BIT (allowing him
to pick the raisins from all BITs), it on the other hand appears to be subsidiary to the special rules in the various treaties,
21 Until present, 4 cases were filed with ICSID under BITs by foreign investors against Pakistan. Of these, 3 were amicably settled while 1 is
still pending.
has recently reviewed its Model BIT in consultation with relevant stakeholders and
final approval of a revised Model BIT is pending .
The comfort offered by MIGA and national investment and export credit insurance
agencies largely depends on the extent to which their terms and conditions are
responsive to investors’ risk perceptions about Pakistan.22 Even more important are
the underwriting practices of the various agencies with respect to Pakistan. Where
an agency charges exponentially high premiums for risks in Pakistan or declines
coverage, it may even weaken Pakistan’s competitiveness by sending an adverse
signal to the international investor community.
To alleviate investors’ concerns about political risks, the BOI will
 In cooperation with the MoLJHR, review Pakistan’s position in pending and
future negotiations of BITs (and investment protection provisions in other
international agreements) in light of the revised Model BIT (once approved)
with a view to maximizing consistency and legal certainty.
 Explore the suitability of project-specific investment agreements under
international law for larger projects in infrastructure, energy, mining as well as
in SEZs.
 Ascertain the underwriting practices of MIGA and investment/export credit
agencies in the investor countries most important to Pakistan. Where
appropriate, discussions will be assumed with such agencies with the aim of
improving their rating of Pakistan; and
 Explore the feasibility of combining various investment protection instruments
into security packages that help in marketing investment opportunities
internationally.
A plan for implementing the above actions will be submitted to the Steering
Committee of the PPPD which might constitute a horizontal working group on the
subject.
3.2
Domestic Pakistani Law
Though important, investment protection through internationalization of legal
conditions is limited by the scope of BITs and other international agreements
(personae et materiae); and it is usually unavailable to domestic Pakistani investors.
These must chiefly rely on the protections afforded under the domestic laws of
Pakistan23.
3.2.1 Foreign Investment Legislation
As part the regulatory framework, Pakistan’s foreign investment regime comprises all
legislation that specifically regulates foreign investments as distinguished from
22 While export credit insurers coordinate the conditions and underwriting policies on the basis of the “OECD Consensus” in the frame of the
international association of export credit and investment insurance agencies (“Berne Union”), the coverage, premiums and underwriting
practices of investment insurer differ considerably.
23 It should be noted however, that ethnic Pakistani with a foreign citizenship as a rule do benefit from BITs and foreign investment
guarantee/export credit insurance schemes. In some cases, international investment protection might also extend to companies incorporated
abroad but (partially or wholly) owned by Pakistani nationals.
34
domestic investments. It includes Pakistan ’s foreign direct investment legislation as
well as provisions in general, notably sector legislation, under which foreign
investments are to be treated differently from domestic investments .
The basics of Pakistan’s foreign investment regime are provided in the “Foreign
Private Investment (Promotion and Protection) Act of 1976 . This Act, however,
applies only to “industrial undertakings” and foresees case-by-case investment
authorizations of the GoP; it clearly falls short of modern wide-spread investment
policies. The “Protection of Economic Reforms Act” of 1992, on the other hand,
entails remarkably strong protections and privileges of foreign investors; it does not
set out a comprehensive foreign investment regime that would override the 1976 Act.
Section 44 of the Civil procedure on the other hand provides for the enforcement of
judgments made by the superior Courts of the UK and reciprocating countries (is
defined as those countries notify in the official gazette).
Pakistan’s sector and general legislation appears to be relatively favorable to foreign
investors: Investment approvals required in four sensitive sectors only; free
remittances of investment capital and proceeds; no upper limit on foreign
shareholdings; no or minimal minimum capital requirements; minimal customs on
capital goods imports; 50% initial depreciation allowance.
The table below provides on overview of the main features:
Non -Manufacturing Sectors
Policy Parameters
Manufacturing Sector
Govt. Permission
Not required except 4
specified industries *
Not required except specific licenses from concerned
agencies.
Remittance of capital,
profits, dividends, etc.
Allowed
Allowed
Upper Limit of foreign
equity allowed
100%
100%
Minimum Investment
Amount (M $)
No
0.3
Customs duty on
import of PME
5%
0%
Tax relief (IDA, % of
PME cost)
50%
50%
Royalty & Technical
Fee
No restriction for payment
of royalty & technical fee.
Allowed as per guidelines - Initial lump-sum upto $100,000 Max Rate 5% of net sales - Initial period 5 years
Agriculture
* Specified Industries:
- Arms and ammunitions
- High Explosives.
- Radioactive substances
- Security Printing, Currency and Mint.
No new unit for the manufacturing of alcohol, except, industrial alcohol
Infrastructure &
Social
Services including IT &
Telecom Services
100%
100%
0.3
0.15
0-5%
5%
PME= Plant, Machinery and Equipment
IDA= Initial Depreciation Allowance
This Investment Policy serves the overriding objective of mobilizing the private
investments needed to achieve Pakistan ’s growth and poverty alleviation targets.
For this objective, it is irrelevant whether investments come from domestic or foreign
sources. Foreign investments moreover operate in the Pakistani market alongside
with domestically-owned businesses and compete with them. This calls for a “level
playing field” where the same framework conditions apply equally to domestic and
foreign investors. “National Treatment” and “Freedom to Invest” are therefore the
internationally recognized cornerstones of a modern, competitive investment
regime24. Similarly the same policy applies to both domestic and foreign investors
regarding the payment of compensation by the Government of Pakistan / and
Provincial Governments for losses incurred due to civil unrest.
In the frame of this Investment Policy, the BOI, and the Ministry of Law, Justice and
Human Rights will draft a modern FDI law based on the principles of National
Treatment and Freedom to Invest.
Restrictions on foreign investments in particular sectors (if any) will be discussed in
the Advisory Boards. In light with the results of these discussions, the ministries in
charge of the sectors concerned will be requested to review such restrictions with a
view to phasing out restrictions not needed for protecting national security or other
overriding public interests.
3.2. 2. Facilitating commercial arbitration
BITs and project agreements offer foreign investors protection only against Pakistan
authorities; both foreign and domestic Pakistani investors must in principle rely on
Pakistan courts and enforcement agencies to pursue their (contractual and property)
rights against private parties. However, both foreign and domestic Pakistan investors
may under certain conditions opt out of the domestic Pakistan judiciary system by
agreeing with their business partners on (international or domestic) commercial
arbitration. The availability and attractiveness of this option depends on the Pakistan
legislation on the recognition and enforcement of arbitral awards as well as
Pakistan’s ratification of pertinent international conventions.
All over the world, commercial arbitration is widely used as an alternative to state
courts. In a 2003 survey of the International Chamber of Commerce, 60 percent of
responding enterprises favored arbitration over domestic courts. In Pakistan, many
contracts between enterprises reportedly provide for international commercial
arbitration.
The effectiveness of commercial arbitration, both domestic and international, hinges
on the enforceability of arbitral awards with carefully limited review by domestic
courts. In Pakistan, the recognition and enforcement of domestic arbitral awards is
governed by the Arbitration Act of 1940 , last amended 1990, and of international
arbitral awards by Ordinance No. 8 of 2005 which needs to be re-signed quarterly.
Best international practice, on the other hand, is based on the 1985 – UNCITRAL
Model Law on International Commercial Arbitration which many countries (e.g.,
Germany, UK) have cast into domestic legislation almost verbatim.
Under the New York Convention and general international practice, arbitral awards
can be enforced only if they obtain a so-called “exequatur”, i.e., a confirmation of
enforceability from the ordinary courts of the country where enforcement is sought.
This requirement applies to both international and domestic arbitral awards. Some
countries (e.g., France, Sweden) have concentrated the jurisdiction over exequaturs
in specialized courts. Such an approach might offer an opportunity in Pakistan of
ensuring the enforceability (and thus credibility) of arbitral awards in accordance with
international practice without extensive training needs for judges.
24 Accordingly, the 2006 „Policy Framework for Investments“ of the OECD does nor distinguished between foreign and domestic investment; by
the same token, most industrialized countries do not have foreign direct investment laws at all.
36
Facilities for commercial arbitration exist in most commercial centers of the world and
are frequently associated with chambers of commerce. In Pakistan, such a center
has been incorporated as a private initiative in 2006 but thus far has failed to become
operative. There also exists a small center for out-of-court resolution of trade mark
disputes. Apart from these initiatives at an embryonic stage, an institutional structure
for alternative settlement of commercial disputes is missing in Pakistan.
A functioning commercial arbitration and mediation system in Pakistan would offer
enterprises an alternative to both international commercial dispute resolution and
recourse to Pakistani courts. It would thus further five objectives, namely:
(1) Improve business confidence in the impartial, professional and timely
resolution of commercial disputes in Pakistan;
(2) Reduce the costs of doing business in Pakistan;
(3) Overcome constraints of domestic enterprises, especially SMEs, in
defending/pursuing their rights against foreign business partners;
(4) Expand practical experience in the Pakistani legal profession on resolving
commercial disputes; and
(5) Reduce the caseload of Pakistani courts.
Initiatives of the MoLJHR will be supported under the PPPD on:
(1) the preparation of a modern Law on (Domestic and International)
Commercial Arbitration;
(2) the creation of dispute resolution centers in Pakistan’s commercial
centers, starting with Karachi and Lahore ; and
(3) the concentration of jurisdiction o ver the enforceability of arbitral
awards in Pakistan in specialized chambers of the civil courts in
Karachi and Lahore .
3.2 .3 Strengthening the Judiciary in the Commercial Area
While international investment protection and a functioning commercial arbitration
and mediation system can considerably enhance investor confidence, they cannot
substitute for a properly functioning judiciary. Legal certainty requires first and
foremost impartial and competent courts that ensure easy access to justice at
reasonable expense and render reasonably predictable decisions without undue
delay. A reform program towards strengthening the functioning of courts in the
commercial area will therefore be supported in the frame of this Investment Policy.
According to international experience, such a reform program could concentrate on
the following challenges:

Strengthening the consistency and predictability of court decisions through
such measures as :
o
Improving the appeal system;
o


Improving the availability and dissemination of legal information25
Raising the expertise of judges in specialized areas of commerce through, for
instance:
o
Creating specialized courts, or specialized chambers within the
ordinary court system on such topics as bankruptcy, taxation,
intellectual property protection, enforcement of arbitral awards;
o
Launching special training programs for judges; and
Accelerating court proceedings by limiting the case load of courts through, for
instance:
o
o
Introducing special procedures without oral hearing for small and/or
uncontested claims;26
Encouragement of alternative dispute resolution;
o
Limitation of appeals through thresholds relating to amounts in
controversy and/or time limits;
o
Liability for expenses provisions that discourage avoidable claims and
encourage amicable settlements.
Efforts of the MoLJHR to strengthen the Judiciary in the commercial area will be
supported in the frame of the PPPD.
25 See, e.g., the „National Judicial Network Project“ which is presently pending in Turkey to electronically link all data banks, files and records
of justice organizations and create data bank on legislation and court precedents.
26 See, e.g., the „Mahnverfahren“ in Germany
38
4. FOREIGN INVESTMENT PROMOTION POLICY
(“FIPS”)
4.1 Scope
As much of the private investments needed for achieving Pakistan’s growth target, is
likely to come from abroad, a Foreign Investment Promotion Policy (“FIPS”) forms an
integral part of this Investment Policy. The FIPS encompasses three distinct lines of
action, namely:
(1) Enhancing the Image of Pakistan as an Investment Location;
(2) Promoting Investment Projects in Pakistan internationally; and
(3) Providing Services to (potential and actual) Foreign Investors in Pakistan.
The FIPS will be carried out by the BOI on the basis of its mandate enshrined in the
BOI Ordinance.27
In consonance with the overriding objective of this Investment Policy to encourage
entrepreneurial investments, the FIPS concentrates on attracting Foreign Direct
Investments to Pakistan. Attracting portfolio investments from abroad is part of the
GOP’s Policy of developing Pakistan’s capital markets spearheaded by the
Securities & Exchange Commission of Pakistan (“SECP”) Nevertheless, capital
market development is an essential pillar of a broader investment Policy; and it is
linked to this Investment Policy through the PPPD (see pg 29).
It must furthermore be noted that the Privatization Commission and the IPDF carry
out activities of their own to attract foreign investments into privatization and
infrastructure projects, respectively. SMEDA furthermore offers “business
development services” to both foreign and domestic investors in SME’s in Pakistan
(see Annex 2).
Nothing in this Investment Policy is meant to interfere with or duplicate these
activities. Action programs under this Investment Policy will rather be conceptualized
with a view to complementing operative programs of the GoP and optimizing
synergies. The BOI will interalia consult with the PC, IPDF , PPIB and SMEDA etc. in
preparing the action programs; and they will be adopted by the PPPD Steering
Committee with the participation of these agencies .
4.2
FDI Targets and FDI Potential of Pakistan
During 2001-2007, FDI to Pakistan has averaged some $. 2.67 billion per year .
While it steadily rose over this period and reached $ 5.1 billion in 2006-07, it in 200708 increased only modestly by 0.3% to $ 5.154 billion. This latter figure is more
encouraging than it might appear at first glance, as it must be seen against the
extraordinary external and internal challenges that Pakistan faced in 2007-08. While
these challenges drove down net portfolio investments close to nil, FDI remained at
previous year’s all-time peak. This implies that foreign direct investors, who tend to
27 See art. 9 d, f, l,o,q,r,s of the BOI Ordinance
take a more long-term perspective than portfolio investors, remain convinced of
Pakistan’s economic prospects, recent turmoil’s notwithstanding. Actions under this
Investment Policy will as a priority concentrate on bringing FDI back to the 20012007 growth path well above the $ 5 billion level. More specific FDI targets will be
set by the PPPD Steering Committee on the basis of a first preliminary “SWOT”analysis (see pg 41).
Figure 2: PI Flow to Pakistan 1964-65 to 2007-08
Foreign Direct Investment in Pakistan
Million US $
6000
5,152.80
5,140
5000
4000
3,521
3000
2000
1,524
1102
682
1000
70 145 108 162
210 216
472 470
246 335 306 354
442
601
798
949
322
485
0
84-85 85-86 86-87 87-88 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08
Direct
Pakistan’s FDI targets are not adequately expressed in figures, though. More
important than capital are contributions of FDI to Pakistan’s development objectives,
notably:
 Improving the competitiveness of production in Pakistan through transfer of
technology and upgrading labor skills, especially in agriculture, horticulture,
mining, manufacturing, housing, engineering and chemicals.
 Boosting Pakistan’s exports through:
o
Facilitating access to overseas marketing and distribution networks;
and
o
Including Pakistani producers and service providers into international
value added chains.
This aspect applies in particular to the agriculture, textiles, fisheries, manufacturing,
engineering and chemicals sectors
.
 Raising capacities of local companies/suppliers through technical cooperation and training of labor; and
40
 Improving corporate governance in Pakistan through bringing in and
demonstrating to local entrepreneurs’ best international management styles
and cultures.
Attracting FDI requires Pakistan to outcompete alternative investment locations. The
BOI will by end 2008 carry out a first and preliminary “SWOT analysis”, analyzing
Pakistan’s strengths, weaknesses, opportunities and threats in comparison to
alternative investment locations from the perspective of potential investors. This
analysis can probably chiefly rely on a multi-sector strengths and weaknessesanalysis (“Business Plan National Trade Corridor-Related”) presently carried out by
McKinsey Consultants for the Planning Commission with the support of the ADB
scheduled to become available in August/September 2008.
FDI promotion activities will concentrate on the sectors with the greatest potential of
attracting FDI in 2008-2010. Subject to the conclusions of the aforementioned SWOT
analysis, these sectors are Agriculture, manufacturing, diary, oil and gas,
infrastructure, construction, mining, power, automotive, light engineering, cement
and IT.
FDI in Pakistan mainly comes from four regions which in 2007-2008 accounted for
71% of total FDI flows to Pakistan. These are: United States (25.4%); South East
Asia mainly Malaysia & HongKong (20.5%), EU mostly UK & NL (12.8%) and Middle
East, mainly UAE & KSA (12.3%). FDI promotion efforts will focus on these regions,
plus China and Far East where there is considerable potential. Bilateral business
councils with countries in these regions will be reactivated; and new councils will be
initiated with China, UAE, KSA and NL . FDI promotion efforts may be extended to
additional home countries with strong sectors that match sector-specific strengths of
Pakistan. (e.g., Turkish construction industry or Australian mining industry).
The aforementioned principal home regions of FDI in Pakistan are also the regions
with the largest expatriate Pakistani communities. A special action plan will be
prepared by end 2008 with the aim of activating Pakistani Diasporas (including
leading professionals) in the aforementioned four focal regions in promoting this
FIPS.
4.3 Enhancing Pakistan’s Image as an Investment Location
4.3.1 Message
Pakistan is widely perceived as a country with high political risks and limited natural
resources. Convincing foreign investors nevertheless to consider investment
projects in Pakistan requires overcoming adverse risk and moderate opportunity
perceptions. A comprehensive proactive image enhancement campaign will be
launched in 2009 to market Pakistan as an attractive investment location.
This campaign will be based on the above-mentioned SWOT analysis of Pakistan as
an investment location. Attention will be drawn to Pakistan’s strengths; and
arguments will be suggested on how to address the (perceived) threats and
weaknesses.
The image enhancement Policy will hence portray Pakistan as a large and rapidly
growing market with an increasingly skilled and yet moderately priced workforce.
Pakistan’s location at the cross-roads of main trading corridors will be emphasized,
along with the pending infrastructure development projects that will further build up
Pakistan’s strategic strengths. The recent depreciation of the Rupee and decline of
asset valuation (in foreign currency) lowers entry costs and thus increases potential
rates of return. It thus might be possible to depict Pakistan as a country with
undervalued investment opportunities.
Credibility will be the first benchmark of the message. Actual and perceived problems
will be addressed but be put in proper perspective. Special attention will be drawn to
the pending reform process (e.g., regulatory reform process, SEZ framework,
institutionalized involvement of private sector in policy-making under PPPD).
Adverse risk perceptions will be alleviated with reference to pending measures
towards improving Investment Protection (see pg 32). The underlying message will
be: preferred investment destination considering its strategic location, skilled human
resources, and abundant natural resources.
An overriding country theme will be developed with which Pakistan should be
associated by international investors, like “Incredible-India” or “Malaysia-Truly Asia”.
In view of the presently low valuation of business assets in Pakistan ( in foreign
currency terms), “Pakistan-the land of undervalued opportunities” might be a first
suggestion for discussion in the PPPD.
4.3.2 Focal Sectors
The campaign will focus on sectors or sub-sectors where Pakistan presently is
internationally and especially regionally more competitive as well as on sectors
where it has the best growth potential. These will be identified in the aforementioned
SWOT analysis. Initially, the campaign will concentrate on five sectors, viz.
agriculture (including food processing), textiles, power generation & distribution,
oil/gas/mining, construction and automotive. In this context, existing and planned
SEZs and Industrial Estates with the attendant incentive packages will be
highlighted.
4.3.3 Targeted investor communities
The campaign will focus on investor communities in countries most likely to be
interested in investing in Pakistan. Target communities will be identified in relation to
the various focal sectors.
4.3.4 Channels and instruments of communication
The image enhancement campaign will chiefly be launched through the Cooperative
Network (see pg 47 below). The BOI will in particular rely on the support of
commercial counselors in the Pakistan embassies and mobilize the honorary
investment counselors in target countries. BOI staff will moreover make
presentations at suitable international conferences and on the occasion of state visits
in target countries. Investor conferences on opportunities in Pakistan are envisaged
to be organized, starting conference with Karachi in the course of 2009 and followed
by conferences in the KSA, the United States and the United Kingdom. These
investor conferences will in particular involve the Pakistani Diasporas in these
countries; and support will be sought from international donors. The investor
conferences may provide opportunities for (re)activating bilateral business councils
and establish a new one in the KSA.
The BOI has already set up a Website and has published an Investor Guide (pocket
& large size); it has also prepared a CDROM with detailed investment information on
42
Pakistan, an Investor Documentary and an Introduction to ID & BOI; and a quarterly
newsletter “The Facilitat”. These information tools will be further refined and
updated. BOI’s website will become the prime portal with comprehensive and up-todate information on investment conditions and opportunities in Pakistan.
4.3.5 Action plan
A detailed action plan on image enhancement will be prepared in cooperation with
the Ministry of Information for discussion in the Sector Advisory Boards (which will be
used as sounding boards) and eventual adoption by the Steering Committee. The
advice of a partner IPA will be sought in developing the action plan.
4.4
Promoting Investment Projects
While image enhancement activities address anonymous investor communities
abroad with the aim of improving their perception of Pakistan as a potential
investment location, the promotion of investment projects encompasses a cycle of
activities from targeting potential investors for specific projects in Pakistan, raising
their interest, to ultimately persuading them to invest in Pakistani opportunities. It
involves (i) maintaining a comprehensive data base and (ii) launching an investment
generation campaign.
4.4.1 Database
The BOI has already set up an internal databank with important investment and
trade-related statistics.28 This databank presently exists in MS excel format; it will be
upgraded to an “e-library” where users can extract information by searching
keywords.
A more comprehensive database will be set up as the backbone of project
promotion. The data- base will include:
 Standardized profiles of “marketable” investment projects in Pakistan;
 The coordinates of intermediaries through which projects profiles can be
disseminated, notably the “Cooperative Network”;
 Prioritized company profiles of target investors; and
 Information tracking investor contacts.
Marketable investment projects will be identified in collaboration with the sector
advisory boards and with the benefit of sector studies and the aforementioned
McKenzie study (see pg 11). Standardized profiles will be prepared for key sectors
to collect and arrange the information necessary for successful investment
generation.
To prepare a list of target investors, information will be collected on foreign
companies in focal sectors the business interests and investment potentials of which
appear to match with the investment opportunities in Pakistan. The initial list will
concentrate on the aforementioned priority sectors (see pg 42) and investor
28 Fl flows to Pakistan, Distribution of FDI to Pakistan by source region/country and sector, economic indicators (stock indices, remittances,
reserves), trade data of Pakistan (overall and by regions), analytical reports on Pakistan.
communities in the aforementioned target regions (see pg 42). A long list of
companies in these sectors and regions will be obtained from a suitable data
provider (such as Hoovers or Dun & Bradstreet). This list will be circulated to the
Cooperative Network and be discussed in the Sector Advisory Boards with a view to
assembling a short list of 20 to 50 target companies for each focal sector with the
relatively highest potential to invest in Pakistan. Investment generation activities will
focus on short-listed potential investors. Information on these will be kept up-to-date.
An initial database will be set up in 2009. This initial database will be constantly
expanded and updated.
4.4.2 Investment generation campaign
The investment generation campaign will include a host of activities with the ultimate
aim of persuading targeted foreign investors to invest in opportunities in Pakistan.
An important interim step will be to persuade such investors to undertake site visits
to Pakistan.
Investment generation activities will include:
 Circulation of “marketing letters” to short-listed target companies alerting
them of opportunities that specifically suit their corporate strategies. BOI has
already model marketing letters for this purpose. These will be reviewed in
the Sector Advisory Boards.
 Participation of BOI representatives in investor conferences in focal sectors
and trade fairs.
 Organizing investor conferences in Pakistan (first such conference planned in
Karachi in 2009) and key investor communities (KSA, USA, UK)(see pg 42).
A schedule of such conferences will be circulated by July of each year for the
following year, starting with July 2009.
 Visits of BOI officials with Pakistani project promoters in target investor
communities and specific target investor companies, possibly in conjunction
with state visits.
 Organizing visits of foreign investor delegations from target communities in
Pakistan.
In carrying out these activities, the BOI will proceed in partnership with private project
promoters wherever suitable. It will also heavily rely on the support of the Pakistani
embassies in key investor communities (commercial counselors) and honorary
investment counselors. Business relationships will also be established with
chambers of commerce and other business associations in target communities.
4.4.3
Action Plan
A draft action plan for investment generation will be circulated in March 2009 for
discussion in the Sector Advisory Boards with a view to adoption by the Steering
Committee. The action plan will also propose a methodology for measuring the
success of investment promotion efforts (conversion rate).
4.5. Investor Services
44
4.5.1. Scope
As most investment promotion agencies, the BOI will offer a host of services to
foreign investors, both prospective and existing. These services will be offered at
five stages of the investment cycle, viz. (i) the preparation of site visits of prospective
investors to Pakistan; (ii) the management of such site visits; (iii) the follow-up on site
visits until a final investment decision is taken; (iv) start-up assistance to foreign
investors in actually making investments in Pakistan; and (v) after-care services after
the investment has been made.
Services during the first four stages of the investment cycle (pre-investment services)
are aimed at converting an initial interest in an opportunity into an actual investment
in Pakistan. Post-investment services drive at encouraging existing investors to
expand their investment in Pakistan.29 They will also serve the purpose of enhancing
Pakistan’s image as an investment location. International experience shows that
prospective investors largely rely on the experience of existing investors in choosing
an investment location.
4.5.2
“One window”
The BOI is supposed to “provide one window facilities for provision of all services
and utilities to investors by concerned federal and provincial agencies”.30 Under this
“one window” or “one stop shop” – concept, presently BOI facilitates between foreign
investors and Pakistani authorities; it would take up requests of investors for permits,
licenses, the provision of utilities and more, and obtain the necessary decisions of
the authorities concerned in an inter-agency administrative process. Many
investment promotion agencies in the world have tried and are trying this approach
but success records are mixed. Few, if any, agencies fully operate as one window.
Presently, the BOI brokers some administrative services, notably the issuance of
visas, work permits and security clearances to foreign investors and their key
personnel. It also facilitates the establishment of representative offices.
Providing comprehensive one window services throughout Pakistan would certainly
exceed the BOI’s present administrative capacities. Nevertheless, the one window concept represents a goal post; the closer the BOI’s actual activities approach this
ideal, the more effective it can be in mobilizing FDI for Pakistan.31 Thus, although the
“one window”- concept will not literally be implemented across the board during this
Investment Policy, it will serve as an orientation for building up the BOI’s investor
service program.
Under the proposed SEZ framework (see p….above), the BOI is envisaged to serve
as a true “one window” in SEZs. This approach follows the Turkish example where
the one window – concept is successfully operated in some “Organized Industrial
Zones”. The Turkish experience will be studied in setting up one windows in SEZs
once the Framework is adopted.
4.5.3 Initial priorities
29 Retained earnings and expansions of existing investments are vital sources of FDI; in many countries the account for over 50% of totals FDI.
30 See art. 9 (f) of the 2001 BOI Ordinance.
31 Among the most successful IPA’s are those that best approximate the „one window“ –ideal, such as the IDA and the SDB.
The bulk of investor services will have to be provided at the site of prospective or
actual investment projects. The BOI’s ability in providing investor services thus
depends on its administrative capabilities in the various commercial centers of
Pakistan, as well as the cooperation of federal and, more importantly, provincial and
municipal authorities.
At present the BOI operates service centers in Karachi, Lahore, Peshawar and
Quetta. Of those, the Karachi office is the best equipped by far. It will therefore be
used as the lead operation; and investor services in other centers will be phased in
with building requisite administrative capacities and in light of the Karachi
experience.
In the initial stage, priority will be given to:
 Preparing “development packages”, i.e., documentation on incentives and
other benefits ( training assistance, access to land, security packages, etc)
for typical investment projects in focal sectors as well as for SEZ’s;
 Negotiating roadmaps with local authorities for navigating investors through
investment approval and business establishment procedures in Pakistan’s
major centers, starting with Karachi;
 Establishing “one windows” in SEZs upon adoption of the Framework Act ;
and
 Facilitating the resolution of problems between (prospective and existing)
investors and Pakistani authorities. For large investments, this service is
already offered centrally by the BOI with the benefit of the Sector Advisory
Boards. For SME investments, this service has to be rendered by the local
BOI service centers. A problem facilitation office will be established in the
Karachi center on a pilot basis.
4.5.4 Action plan
An action plan on phasing in Investor Services will be circulated in light of the BOI’s
success in upgrading its administrative capacities and securing attendant financing
(see pg 47).
46
5.
BUILDING ADMINISTRATIVE CAPACITIES
As noted before, implementing this Investment Policy exceeds the capacities of the
BOI by far; it requires joint efforts of all stakeholders in Pakistan’s economic growth.
Accordingly, administrative capacities for implementing this Investment Policy will be
developed in two ways, namely by:
(1) Building a Co-operative Network of organizations that will join
forces with the BOI to carry out this Investment Policy; and
(2) Upgrading the administrative capacities of the BOI as required to
meet the challenges under this Investment Policy.
5. 1. Building a Co-operative Network
5.1.1.
Purposes
The BOI will bring together a host of organizations, public and private, Pakistani and
international, with a view to co-operating towards the targets of this Investment
Policy. This endeavor will pursue two distinct purposes, viz.,to:
(1) Overcome jurisdictional
Investment Policy; and
constraints
in
implementing
this
(2) Utilize existing administrative capacities rather than building new.
5.1.2. Overcoming Jurisdictional Constraints
Article 9 of the BOI Ordinance bestows a comprehensive mandate on the BOI in
mobilizing private investments, domestic and foreign, in Pakistan. However, this
mandate is subject to the powers vested by Pakistani legislation in other agencies. In
improving the regulatory framework for (domestic and foreign) business activities in
Pakistan in particular, the BOI is called upon to “coordinate with concerned
Ministries, Departments, agencies and Provincial Governments” rather than itself
advancing reform legislation (see art. 9 (e) of the BOI Ordinance). Programs and
instruments for promoting domestic private investments in Pakistan are moreover
administered by specialized institutions, such as SMEDA (see pg 27), the IPDF (see
pg 25) and the National Industrial Parks Development and Management Company
(“NIPDMC”).
Nothing in this Investment Policy is meant to interfere with the mandates of existing
agencies in Pakistan. This Investment Policy aims at contributing to the coherence of
actions in the various policy domains and at optimizing synergies of the various
programs in support of investments. Towards this end, all public-private policy
consultations on improving the investment climate in Pakistan will be brought under
the umbrella of the Public-Private Policy Dialogue (see pg 24). And the BOI will
continue to conclude MOUs with agencies administering support programs for
private investments. Such MOU s have already been concluded with the IPDF ,
SMEDA, PAMCO and CSF.
5.1.3.
Maximizing Administrative Efficiency
While specialized agencies run support programs for domestic private investments in
Pakistan, the BOI has been created as Pakistan’s lead executive agency on
attracting foreign investments to Pakistan (see Art. 9 (l), (m), (o), (q), (s) of the BOI
Ordinance). The Foreign Investment Policy outlined in chapter 3 above will therefore
be carried out by the BOI as its own prime responsibility. However, the BOI will
largely rely on other agencies and business organizations in identifying and
conceptualizing “marketable” investment projects in Pakistan. Moreover, the BOI will
count on the support of the Pakistani embassies and strategic partnerships with
foreign business organizations in carrying out its image enhancement and
investment generation activities (chapters 5.3 and 5.4 above). This Policy is
designed to utilize existing facilities and capacities to the extent possible rather than
creating new capacities at considerable cost.
5. 1.4 Members of the Co-operative Network
In line with the aforementioned purposes, the Co-operative Network will comprise
Pakistan and foreign organizations as well as public agencies and NGOs. More
specifically, it will include:
 Pakistan agencies at the central, provincial, and municipal levels with
investment
related responsibilities;
 Business organizations in Pakistan;
 Business organizations in target foreign investor countries;
 Pakistan embassies and honorary investor counselors.
The BOI will decide on a case-by-case basis whether and, if so, how co-operation
with these organizations will be formalized. MOUs have already been concluded with
the CSF, the IPDF, the Overseas Investor Chamber of Commerce and the Pakistan
Business Council.
As regards foreign institutions and organizations, network building will initially
concentrate on the United States, the Middle East (KSA, UAE, Kuwait,), Europe
(United Kingdom, Netherlands), China, and Far East. The commercial counselors in
the Pakistani embassies as well as the honorary investment counselors in these
regions will be initial international members of the Co-operative Network. Contacts
to suitable chambers of commerce and other business organizations and authorities
in the aforementioned target regions will be established in 2009 and 2010 through
the Pakistan embassies with a view to including such institutions in the Cooperative
Network. Additional target countries may be added to the Cooperative Network at a
later stage.
Commercial counselors in the Pakistani embassies should become the prime
antennae of the BOI in the aforementioned regions. They should manage the
interaction with the members of the Cooperative Network and carry out investment
promotion activities in the countries concerned; in particular, they should build and
maintain personal relationships with target investors in their countries.
48
This proposal is made with a view to avoiding the need of posting special investment
counselors in Pakistani embassies or even open special investment promotion
offices in key countries, as is the practice of many countries with which Pakistan
competes for investments.32 It must be realized, though, that commercial counselors
presently focus on trade promotion and report to the Ministries of Commerce and
Foreign Affairs. The BOI will in discussion with these ministries explore the feasibility
of entrusting commercial counselors with investment promotion responsibilities and
resolving the attendant administrative implications (reporting relationship, training of
counselors, etc.) .
Special efforts will be made to mobilize the Pakistani Diasporas in the
aforementioned target countries, notably in the United States, the UK, the NL and the
UAE.
5.2. Upgrading BOI’s Administrative Capacities
Despite the envisaged reliance on the cooperation of other organizations,
implementing this Investment Policy will require upgrading the administrative
capacities of the BOI and its regional centers considerably. In particular, a state-ofthe art management information system will have to be installed, and human
resources will have to be developed that meet the challenges of the job.
5.2.1
Information technology
As has been shown in the previous chapters, comprehensive, readily accessible and
current information must support virtually all activities under this Investment Policy.
Much more is needed than collecting and collating data. A successful proactive
investment Policy will require a dynamic interactive IT system that:
 Provides comprehensive and up-to-date information on the status of
investment conditions and investment projects in Pakistan;
 Facilitates rapid and efficient communication amongst the members of the
Cooperative Network;
 Provides access to intelligence into industry trends, company strategies,
investment promotion activities of competitor countries, etc worldwide;
 Allows tracking progress of and follow-up on the various activities; and
 Enables the BOI to maintain relationships with targeted and current investors.
Such a system will have to include a Customer Relationship Management (CRM)
and a Client Tracking System (CTS).
5.2.2 Human resources
Implementing this Investment Policy not only requires additional human resources; it
needs a different type of talent and mindset than conventionally required from
government officials. While government officials typically react to actions and
requests of citizens, investment promoters must pro-actively market projects
32 For instance, the 2006 established Turkish „Investment Support and Promotion Agency“ has already set up a representative network in 13
countries with offices its own.
worldwide. They are typically the first Pakistani contact persons of senior executives
of international corporations whom they want to attract to Pakistan. In this mission,
they compete with investment promoters from other countries. To succeed, they
must display the qualifications and focus on business results that are expected in
international business.
The BOI officials in charge of the PPPD will be the liaisons between the GoP and the
Private Sector. They will have to manage an interactive process between the GoP
and the Private Sector which cuts across many policy domains. Indeed, the success
of the PPPD will chiefly depend on the competence, commitment and dynamism of
the Steering Committee secretariat.
To some extent, the BOI will have to supplement its own staff with consultants and
expert bodies, as envisaged in art. 9 (k) of the BOI Ordinance. The selection criteria
and financial conditions will be determined under the Action Plan below.
5.2.2 Action Plan
IT and Human Resource development strategies will be prepared. In this endeavor,
the BOI will seek the advice of an advanced well functioning investment agency with
a similar mandate as the BOI, such as the Singapore or Malaysia Economic
Development Board. It will be explored whether such an agency might be prepared
to share its expertise with the BOI on concessional terms. These strategies will also
be discussed with potential donors in the context of seeking extra-budgetary
financing (see chapter 6 below).
50
6.
FINANCING
6.1. Need for Increased Funds
The present budgetary resources of the BOI are clearly insufficient to meet the
challenges of this Investment Policy.33
According to international experience, functioning investment promotion agencies
yield high economic returns – one percent increase in an IPA budget tends to
translate into a 0.25 percent increase of FDI into the country concerned.34 Financing
an IPA is hence a sound investment in future economic growth. Pakistan’s fiscal
constraints make it nevertheless necessary to seek sources in addition to the budget
for funding the necessary capacity building of the BOI. It should also be taken into
account that investment mobilization activities alleviate poverty only indirectly and in
the medium- to long term and that FDI is still fraught with some political controversy.
To ensure a broad social support for the BOI and its mission, extra-budgetary
financing will be sought to the extent possible for the implementation of this initial
Investment Policy. Once the contribution of investment mobilization activities to
economic growth and poverty alleviation in Pakistan become visible, it should
become broadly acceptable to shift the attendant costs predominantly to the budget.
6 .2
Self-financing
Financing the activities of the BOI from revenues generated by these activities, i.e.,
charges levied on (potential or actual) investors looks at first glance attractive.
International experience suggests, however, that this is not feasible. Levying new
charges on investors would make investing in Pakistan more expensive, thus
weaken Pakistan’s competitiveness as an investment location and hence defeat the
very purpose of this Investment Policy. Especially upfront charges payable before
the start of investment operations are likely to deter investors.
It must furthermore be cautioned that any attempt at introducing new charges in
connection with this Investment Policy could easily discredit the BOI in the eyes of
investors. They might look at the BOI as yet another Government bureaucracy
holding out its hand; the one stop – ideal could become perceived as a “one more
stop” – reality.
33 The 2007-08 budget of the BOI (without staff salaries) totals Rs. 26.95mn (printing 3.1; advertising 7.6; delegations 0.1; conferences 16.15) For
comparison, see below the 2004 budgets of selected IPAs elsewhere:
Country
Annual FDI Promotion Budget
Population
Per capita Budget
($mill)
(mill.1999)
($)
Singapore(EDB)
45.0
3.2
14.06
Ireland(IDA)
41.0
3.7
11.16
Costa Rica(CINDE)
11.0
3.5
3.14
Mauritius(MEDIA 1996)
3.1
1.2
2.58
Dominican Republic(IPC)
8.8
8.4
1.05
Malaysia(MIDA)
15.0
22.7
0.66
Source: UN World Development Report, 2005
34 See Jacques Morisset & Kelly Andrew-Johnson, “The Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment”, FIAS
Occasional Paper No. 16, Washington, D.C. 2004
It is therefore not proposed to finance activities under this Investment Policy through
charges on investors, in what configuration ever. This statement might, however, be
reviewed for subsequent investment strategies. Once the BOI has demonstrated its
added value to investors, it might be in a position to charge for specialized services,
such as tax/legal counseling, assistance to securing industrial sites, etc. This
possibility might especially exist for certain aftercare services (see ch. 4.5 above).
The expenses related to the PPPD (ch. 2 above), Image Enhancement and general
Investment Generation (ch’s. 4.3 & 4.4 above) will also in the long run have to be
borne by the budget or donors.
6 .3 Donor Support
Examples exist where IPAs during their start up – phase were supported by
international donors and/or IFI’s, notably the European Union35 and the World Bank.
A strong case can be made for obtaining similar support for the Pakistani investment
Policy. Potential donors will be contacted with a view to launching an investment
Policy support project.
In view of the lead times of international donors in conceptualizing and approving
new projects, it is unlikely though, that such a project would become disbursable in
2008. More realistic is end 2009 or even 2010. A donor funded investment Policy
support project would probably at best support the last year of this Investment Policy
(2010) and the subsequent investment Policy.
Discussions will nevertheless be pursued with potential donors on whether and how
some support can be mobilized for 2008 and 2009. In this context, it must be realized
that a qualified project proposal to potential donors will have to be prepared in 2008 09, including a vision for investment mobilization beyond this Investment Policy. For
2008 and, possibly, 2009 financial support will therefore be sought from the CSF in
the frame of the latter’s MOU with the BOI. This support will apply to specific
activities under this Investment Policy, including the preparation of qualified project
proposal to potential donors.
6 .4 Phasing in of Activities
Given BOI’s resource constraints, this Investment Policy is launched with a caveat
that the funding needed for building the necessary capacities can be mobilized when
needed. In the meantime, activities will be phased in gradually in tandem with
progress in capacity building and resource mobilization.
6 .5
Action Plan
A preliminary budget for implementing this Investment Policy will be prepared. The
budget will specify to what extent activities can be carried out with the present
resources of the BOI and to what extent additional financing is needed. Discussions
will be pursued with the CSF and donors on possibilities of short-term financial
support to close the potential financing gap. A report on these discussions will be
annexed to the preliminary budget. If the financing gap cannot be closed, the
activities envisaged in this Investment Policy will be reviewed and priorities will be
determined. The final budget for implementing this Investment Policy will be
submitted by end 2009.
35 EU support played a crucial role in the creation of the Polish, Hungarian and Czech IPA’s. These three IPA’s have become success stories. .
52
In 2008-09, a funding proposal will be prepared as a basis for seeking medium-term
donor support for Pakistan’s investment Policy. This proposal will most likely cover
the period 2010-2016; it will hence include a vision for a longer-term investment
Policy.36
Informal discussions will be pursued with potential donors throughout 2008-09. By
mid-2009, it is envisaged to submit formal proposals to interested donors with a view
that the project becomes operative by end 2009.
36 It is assumed that the subsequent investment Policy will be concomitant with the next MTDF and thus extend over 5 years.
ANNEXURE 1
PAKISTAN PUBLIC PRIVATE PARTNERSHIP PROGRAM
Public Private Partnership (PPP) is a concept that involves the public and private
sectors working in cooperation to provide services.37 In a PPP the private sector
provides a service on behalf of the public sector for a fixed period of time and usually
undertakes substantial responsibility for financial, technical and operational risk
associated with the performance of that task or function. The private sector
compensation is based on the availability and quality of the service that results from
the performance of the task or function, and may be given by the public sector or
directly by end users. Some PPPs involve the private sector making use of public
sector property for commercial use for a fixed period of time and compensating
public sector for the use. In practice PPPs may be a combination of tasks and use of
state properties for which the private sector is compensated with a mixture of user
charges and public sector payments. Unlike conventional procurement PPPs are
structured and procured on the basis of outputs and not inputs, and as services, not
assets.
PPPs have become mainstream throughout the world over the last decade, fuelled
by a general concern about inefficient service provision by the public sector, the
recognition that the private sector can provide better services under the right
circumstances and if given the right incentives. PPPs have also been triggered by
insufficient investments in the economy and growing pressures on government
budgets and the recognition that private capital could be used to fund some of these
investments. PPPs have taken place mainly in economic infrastructure, such as
telecommunications, transport, oil and gas, power and water. However, recently,
attention has also turned to social infrastructure, such as health and education, and
municipal services (garbage collection, facilities management, etc).
Pakistan’s fiscal constraints are growing while the demands are ever increasing.
According to a World Bank benchmark a country like Pakistan should be investing
about 7-9 % of its GDP on infrastructure. Given the fact that the global infrastructure
needs till the year 2030 are estimated to be around US $ 41 Trillion, Pakistan must
be able to present well structured and bankable PPP projects if it is to attract private
investment. Pakistan’s backlog of required maintenance and new infrastructure is a
serious impediment for sustained growth and competitiveness. The resource
requirements for this are much greater than can be provided through public sector
resources alone.
Pakistan now has an established and well structured Public Private Partnership
(PPP) program backed a core capacitated team of professionals, under the umbrella
of the Ministry of Finance (MoF). The capacity is housed in the implementation arm
of the program, the Infrastructure Project Development Facility (IPDF). Pakistan’s
PPP program is homegrown - based on its own peculiar needs; however it has
drawn heavily from the international best practice. The program is supported by the
two key multilaterals – the World Bank and the Asian Development Bank. Pakistan
37 Services as used here as a wide definition, it could include a task or a function or correspond to a development facility
54
has signed a MoU with Partnerships UK for collaboration and assistance, and it is
also the signatory to the ASEAN PPP protocol.
The rationale for IPDF’s creation was based on international and regional experience
and in view of the dearth of requisite skills and resources and given the enormity of
the task involved and to make the PPP program successful (capacities need to be in
place to structure PPP transactions so that they are bankable), the GOP had
husbanded its resources and established IPDF to act as a catalyst for the
development of PPP program.
One of the key lessons learnt from international experience is that PPP programs
only succeed where there is ownership at the highest level. A clear message needs
to be sent to all public sector institutions that they must explore the PPP option
before they become eligible for public sector funding. There is no need to reinvent,
the present structure and program (based on international best practice and adapted
to local conditions) in Pakistan provides a strong edifice for the Government to build
on. An operational institutional arrangement is already in place and standard
documents are available. What is required going forward is as follows:

Integrating PPP into the Planning process

Operationalizing the over arching institutional framework (VGF, PDF and
IPFF):
o
PDF: A project development fund can help to ensure sufficient
resources are invested into a PPP so that it will be robust and
bankable. Professional firms to run the transactions and solicitation
(PDF);
o
IPFF: Long-term domestic currency financing is not readily available.
Ultimately, over the long term an efficient and properly functioning
banking sector and capital market will provide these resources, but
this is a long way off in Pakistan. Other forms of financial support
such as through an Infrastructure Project Financing facility may be
necessary;
o
VGF: In case of affordability gaps (difference between economic
viability and financial viability of a project) there may be a need for
subsidies. An Output-Based Aid (OBA) approach can be developed.
The key to effective and efficient subsidies is to link subsidy payment
to the delivery of pre-agreed outputs through a Viability Gap Fund;
o
Commence high visibility and impact transactions.
In order to structure a comprehensive infrastructure program, a PPP network of
relevant federal ministries, IPDF and provincial/local government agencies in charge
of execution of the infrastructure projects needs to be developed. The network is
required for several reasons, including:
(1) Decentralization requires that Implementation Agencies (IAs) closest to
services delivery identify and initiate infrastructure service delivery projects.
IAs must be responsible for identifying and prioritizing projects – IPDF can
provide them technical assistance in doing it.
(2) There is a large capacity gap in all levels of IAs in undertaking PPPs. These
capacities can be built over time and IPDF can assist.
(3) There is a need to create uniformity in how PPPs are approached in terms of
procurement process and risk profile. IPDF is creating standardized
documents and guidelines that can be adopted by implementation agencies.
This will give investors and financiers a lot of comfort and bring predictability
(vs. ad-hocism) in project implementation.
56
This network will be comprised by the following main stakeholders:
COUTNRY PPP NETWORK
SECTOR
MINISTERS
PPP Nodes
• Sector Strategies
• Identification,
•
•
procurement and
execution of
projects
Project monitoring
Sector toolkits
Provincial
Governments
• Project
development
& monitoring
Local
Governments
• Project
development
& monitoring
MINISTRY OF
FINANCE
IPDF
Central PPP Unit
•
Strategies to accelerate
provision of infrastructure
• Technical support
• Cross sector
coordination
• Projects assessment
• Standard procedures
• Promotion Policy
RISK MANAGEMENT
UNIT
• Issue guarantees
• Manage contingent
•
Liabilities
Manage guarantee
fund
IPFF
(1) IPDF provide assistance to line ministers and provincial/local governments to
improve the structure of the projects and facilitate the promotion of the overall
infrastructure program. Whenever the number of transactions in the pipeline
justify, IPDF will help these agencies in setting up nodal PPP Units – thus
over time there will be a web of PPP units across the country that will provide
synergy to the overall program.
(2) Provincial / Local Governments. The Government of Punjab has developed
substantial PPP capacities through its Urban Unit located in the Department
of Planning and Development (P&D). This model can be replicated in other
provinces. Similarly the City District Government of Karachi is setting up
capacities to undertake infrastructure / PPP projects. If successful this model
can be replicated, in the beginning at the City District government level – at
least initially.
(3) Sector Ministries interact with the PPP network through PPP Nodes, which
will become specialized units to identify, prepare and execute PPP projects
related to their corresponding sectors. The PPP Nodes to be created in the
line ministries, provincial governments and local governments are
counterparts to the IPDF and focal points for state owned companies and
local governments’ infrastructure projects. Its main functions include:
o
Development of common strategies and development of projects.
o
Counterpart for IPDF on all sector issues, including cross sectoral
issues, access to technical assistance and best practice, access to a
proposed Project Development Fund (PDF) – to pay for project
Transaction Advisors, project screening, access to Government
support, among others.
o
Development of communication Policy to disseminate relevant PPP
issues to stakeholders, such as plans, progress, project pipeline etc.
(4) Ministry of Finance which will participate through a Risk Management Unit to
evaluate and grant government support to certain infrastructure projects. The
Ministry will also provide Viability Gap Funding and funds for recruitment of
Transaction Advisors.
(5) Planning Commission establishes a PPP Unit. The purpose of this unit will be
to ask the question ‘why can’t this project be done as a PPP’ whenever there
is a request for funding a project under public sector development budget.
This will help relieve the pressure on the tight fiscal space and promote the
use of ‘off balance sheet’ methods of financing.
Milestones Achieved so far by IPDF
Progress so Far
(1) Formal launch of IPDF by the Prime Minister in November 2006
(2) Approval of PPP Policy by the Government in November 2007
(3) Guidance and Support











Feasibility Guidelines
Procurement Guidelines
Standardized Contractual Provisions (Standard Contract)
Viability Gap Funding Guidelines
Risk Management Framework (Guarantees)
Project Development Fund Concept Note
Infrastructure Project Financing Facility – Draft Business Plan
Inception Guidelines (draft)
Economic Cost Benefit Guidelines (draft)
Environmental & Social Guidelines (draft)
Tariff Guidelines (Draft)
(4) Capacity Building




Launching Public Private Partnership - 2006
Workshop on PPPs in Transport Sector - 2007
Workshop on Unitary Payment based PPPs – 2008
Workshop on PPP Life Cycle and Municipal Sector - May 2008
(5) Project Pipeline List of Projects is being developed in consultation with the
Planning Commission, Finance Ministry and other stakeholders.
58
(6) Consultative Forums representing Public & Private Sector constituted



Advisory Panel
Review Group
Task Force
ANNEXURE 2
Small & Medium Enterprises Development Authority
A thriving Small and Medium Enterprise (SME) sector has long been recognized as
one of the characteristics of any prosperous and growing economy. It has been
argued that SMEs contribute to development in multiple ways, creating employment
for an expanding urban workforce, and providing much needed flexibility and
innovation in the economy as a whole.
In Pakistan, SME sector is considered as the backbone of its economy. The
significance of their role is indicated by various statistics, SMEs constitute 99%
(approximately 3.2 million) of all economic establishments. Enterprises employing up
to 99 persons comprise over 90% of all private enterprises in the industrial sector
and employ nearly 78% of the non-agriculture labor force. They contribute more than
30% to the GDP and account 25% of exports of manufactured goods. During the last
decade, promotion of SMEs has therefore remained the center piece of
Government’s Policy for economic revival, poverty alleviation and employment
generation.
Small and Medium Enterprises Development Authority (SMEDA) is an autonomous
body working under the umbrella of the Ministry of Industries & Production with a
mandate to develop and promote Small & Medium Enterprises (SMEs) in Pakistan.
SMEDA was established in 1998 to provide fresh impetus to Pakistan’s economy
through launch of nationwide SME support programs. Broadly, it contributes towards
the growth and development of SMEs in Pakistan through:




the creation of a conducive and enabling regulatory environment;
provision of business development services to SMEs in all areas of business
management
development of sectors & industrial clusters;
direct interventions through common facility centers & demonstration projects
SME Policy 2007
The approval of Pakistan’s first SME Policy ushers in a new era of focused SME
development initiatives necessary for this sector to realize its true potential and
contribute towards economic development. The objective of SME Policy is to provide
a short and a medium to long- term policy framework with an implementation
mechanism for achieving higher economic growth based on ‘SME Led Economic
Growth – Creating Jobs and reducing Poverty’. The Policy suggests concurrent and
specific policy measures in all possible areas of business environment, access to
finance, human resource development, support for technology up-gradation and
marketing.
Business Development Services
Walk-in Facilitation: SMEDA with its network of offices located in the four Provincial
Capitals and 21 Nation-wide Regional Business Centers (RBCs) provides business
60
development and over-the-counter services to walk-in SMEs. Portfolio of SMEDA
Business Development Services include; legal services, technical guidance, financial
advice etc.
Pre-Feasibilities & Business Plans: Pre-feasibility studies serve as a first step
towards making informed investment decisions. As part of its drive to identify new
business opportunities, SMEDA over the years has been developing pre-feasibility
studies in areas bearing attractive investment prospects. SMEDA has so far
developed more 140 pre-feasibility studies that can be downloaded from its website
free of cost. Business Plan development for new entrepreneurs and existing
businesses is another specialized function of SMEDA. These business plans, apart
from giving an overview of the project also include detailed information on
operational management, marketing and financial plan.
Training Services: SMEDA provides demand driven training services to SMEs
through a wide range of programs, workshops and seminars. A comprehensive
Training Needs Assessment exercise is conducted every year for designing training
programs. Till date SMEDA has imparted training to over 45,000 participants in 70
cities on diverse subjects. A sizable number of these training programs are aimed at
providing participants with the requisite skills and knowledge to start their own
businesses, thus promoting entrepreneurship is at the heart of SMEDA training
services.
SMEDA Web Services: SMEDA offers a host of services through
www.smeda.org.pk, www.iin.com.pk, www.smap.smeda.org.pk www.win.org.pk, and
www.urdu.smeda.org.pk. The services offered through these websites include free
downloading of business guides, toolkits and free accounting software.
Information Provision: Over the last few years SMEDA has published a number of
Business Guides to educate SMEs on domestic and international business
dimensions i.e. Trade Secrets, Trade in Services, How to Approach Banks, Secrets
of E-Commerce, etc.
Local Industry Up-gradation: Low productivity and competitiveness are two major
constraints inhibiting Pakistan’s manufacturing sector. These two constraints are
more apparent in Textile and Auto manufacturing industries making them vulnerable
to international competitors. SMEDA in collaboration with international development
agencies (i.e. JICA, GTZ, SES) invites international experts to help SMEs overcome
barriers to profitability and provide access to high value markets through process
streamlining in textile and auto-parts manufacturing. International experts assist local
manufacturers’ production staff on workshop floors for troubleshooting production
inefficiencies.
Sector Policy Development
SMEDA directly interacts with stakeholders operating in clusters to prioritize their
needs, identifying issues that impede their growth. As an outcome of these
consultations, sector development strategies are developed that are implemented
through different forums. Sector development strategies that are being implemented
on a public-private- partnership template includes; Gems & Jewelry, Dairy, Marble &
Granite and Furniture. Dedicated sector development companies have been
established under section 42 of Companies Ordinance 1984 as subsidiary
companies of Pakistan Industrial Development Corporation Pvt. Ltd. (PIDC). These
Sector Development Companies are undertaking a number of development projects
envisaged in the Sector Development Strategies i.e. setting up Common Facility
Centers (CFCs), Training Facilities and Research & Development Centers etc. The
projects will directly create employment opportunities for hundreds of people while
indirect employment contribution will be significantly more.
62
Infrastructure Development for SMEs
It is widely accepted that institutionalized support aimed at assisting SMEs and
industrial clusters in developing and adapting to the changing world competition is
crucial. Cognizant of SMEs’ productivity and competitiveness shortfalls, need for
setting up various Common Facility Centers (CFCs)/demonstration projects was
appreciated in diverse SME sectors. In 2006 -07, SMEDA initiated a series of
demonstration projects/CFCs in major SME clusters, funded through Public Sector
Development Program. A snapshot of some of the PSDP funded projects is as
under:
Women Business Incubation Centre (WBIC), Lahore: WBIC provides ‘hands-on
support’ to Women Entrepreneurs (WEs). It offers a conducive environment with inhouse business support services exclusively for women entrepreneurs.
Gujranwala Business Centre (GBC): Gujranwala Business Centre (GBC) is a state
of the art six storey complex offering shared display facilities, conference and training
facilities, services in the area of product design, product quality, international
standards and packaging.
Agro Food Processing Facilities (AFP), Multan: Agro Food Processing Facilities
(AFP) comprise fruit processing (Mango & Guava Pulp) and vegetable processing
(fresh fruit/vegetable grading and packaging) facilities. The Facility is being
established in collaboration with Punjab Small Industries Corporation (PSIC), Mango
Growers Association Multan (MGAM) and Multan Chamber of Commerce and
Industry (MCCI).
Revival of Cutlery Institute of Pakistan: Wazirabad cluster has a population of
approximately 150,000 people. About 25% of the population is directly or indirectly
engaged in manufacturing of knives, swords, daggers, sabers, spoons, forks, blades,
etc. To meet the challenges of export markets and to fulfill the technology and HR
requirements of the sector, Cutlery Institute of Pakistan (CIP) established in 1999 is
being revitalized.
Glass Products Design & Development Centre, Hyderabad: A Glass Products
Design and Development Center is being set up with an objective of facilitating the
Glass Bangles Cluster of Hyderabad to diversify production into other glass products
such as decorated ware, tableware, automobile headlight lenses, glass bulbs, shells
and consumer products such as bowls and ashtrays.
Sports Industries Development Centre (SIDC), Sialkot: A common facility
centre/demonstration project, “Sports Industries Development Centre (SIDC)” is
being set–up to introduce advanced technology for the local sports industry.
Aik Hunar Aik Nagar (AHAN) – Rural Enterprise Modernization Project
The primary objective of this project is to alleviate poverty in rural and peri-urban
areas of Pakistan by supporting rural, micro and small enterprises engaged in nonfarm products. AHAN has initiated a number of pilot projects/interventions in all the
four provinces. These interventions assist in skill enhancement of artisan, improving
product design, encouraging innovation, better quality management, enhanced
marketing linkages and support from microfinance institutions.
For detailed information on SMEDA initiatives kindly visit www.smeda.org.pk
ANNEXURE 3
Introductory Brief
Privatization Division
Privatization of public sector entities is an on-going process being executed by the
Privatization Commission (PC) since its inception in 1991. Privatization Commission
remained part of Finance Division till creation of a separate Ministry of Privatization
on 28th November 2000. The creation of a fully fledged Ministry/ Division to look
after the affairs of privatization was motivated by the fact that PC had been
converted into a body corporate through promulgation of PC Ordinance 2000. This
entailed high level of proficiency and quick decision making. Besides, privatization
program approved by the Cabinet also broadened the scope of PC by assigning to it
activities like restructuring, deregulation and post privatization processes.
In November 2002 the scope of the Ministry was enhanced to include local as well as
foreign investment. Board of Investment was thus attached to the Ministry which was
renamed as Ministry of Privatization and Investment on 4th September 2004.
Privatization Commission
Privatization Commission is the main executing arm of Privatization Division. It is
headed by the Chairman who is also the Minister for Privatization and Investment
Division. The human resource of the PC comprises of Government officers and
consultants/ transaction managers and support staff.
The assignments of the consultants / transactions managers include preparing the
terms of reference and hiring financial advisors, lead managers and valuators as
well as overseeing and assisting them to ensure timely submission of deliverables,
liaising with the relevant ministry, regulators, and management of the entity being
privatized, and advising on sectoral policies and regulatory frameworks related to
privatization. Consultants/ transaction managers are also providing legal, accounting
and other necessary support.
They also prepare summaries seeking approvals on different aspects of the
privatization transactions from the CCOP and the PC Board. The consultants also
assist various committees like Transaction Committee, Negotiations Committee, and
Prequalification Committee etc. In this capacity they assist in evaluation of the
technical and financial bids submitted by potential Financial Advisors / Buyers.
64
Mode of Privatization
Various modes adopted by the Privatization Commission for privatization include the
following:Sale of assets and business
PTCL, HBL, UBL, KESC etc.
Public offering of shares
through a stock exchange
NBP, OGDCL, UBL, HBL etc
Management or employee
buyouts by management or
employees of a state owned
enterprise
Millat Tractors, ABL, Wah Cement,
Lease, management or
concession contracts
Oil Fields
Any other method as may be
prescribed
GDRs of UBL, OGDCL etc.
Privatization Process
The privatization process, which is aimed at selling government property in an open
and transparent manner with a view to obtaining the best possible price, varies
somewhat depending on the nature of the asset being privatized, on the proportion
of shares being offered for privatization, and on whether a transfer of management is
involved. The Board of the PC decides what kind of process will be followed.
Following are typical steps in the privatization process of a major unit:


















Approval of CCI.
CCOP decision to privatize an entity
Hiring of a Financial Advisor or Valuer of International Fame
Due diligence by FA or PC
Finalize privatization Policy (Transaction Structure)
Any needed restructuring and sectoral and regulatory reforms enacted
Invite Expressions of Interest (EOI) from Local as well as International
Investor.
Firms submit statement of qualifications
Firms pre-qualified
Due diligence by potential buyers
Sharing Bid Documents / Instructions with pre-qualified bidders
Pre-bid conference
Approval of valuation (reference price) by CCOP
Bidding process (media invited to observe bidding)
Approval of bidding results by PC Board and CCOP
PC sends Letter of Intent to successful bidder
Sale agreement finalized between PC and Buyer
Handing over of entity after receipt of full payment
Public Offerings
The Privatization Commission Ordinance 2000, inter-alia, mandates the PC to
privatize any state owned entity through public offering of shares through a stock
exchange. Accordingly the PC undertook an ambitious program of offering shares to
the general public with the aim of passing on the benefits of privatization to the
common man and broadening and deepening the shareholder base of entities
thereby strengthening and developing the stock markets.
Performance
The details of privatization conclude since inception of Privatization Commission in
1991 is tabulated hereunder:
SECTOR
From 1991 to From July 06 to From July 07 to
June 06
June 07
June 08
No. Amount No. Amount No.
Amount
Banking
Capital Market
Transaction
18
32,190 3
Energy
14
Telecom
No.
Total Amount
7
41,023
22
133,124
51,756
14
51,756
4
187,360
4
187,360
Automobile
7
1,102
7
1,102
Cement
16
11,862 1
4,316
17
16,178
Chemical / Fertilizer 20
24,353 2
16,229
22
40,582
7
41,023
83,614
1
17,320
Engineering
7
183
7
183
Ghee Mills
24
843
24
843
Rice / Roti Plants
23
324
23
324
Textile
3
4
371
Newspapers
Tourism
5
4
5
4
271
1,805
6
166
159
475,081
Others
Total
6
158
215 1
156
271
1,805
159
353,446 7
104,315 1
Rs. in million
17,320
In the current fiscal year we are expecting conclusion of 16 transactions resulting in a
net proceeds of US$ one billion.
66
ANNEXURE 4
1. VENTURE CAPITAL IN PAKISTAN
Current State of Venture Capital in Pakistan
Driven by the Government of Pakistan’s commitment to economic liberalization
Pakistan is forecast to grow at around 7% per annum, exceeding the Asian average.
Moreover, Pakistan’s strategic geographic location makes it a trading and energy
bridge for Asia and the Middle East.
So far, there are no tangible results or notable success stories of these funds in the
Pakistani venture capital market. The reason is because of underlying factors both
on the demand and supply side that need to be addressed in order to make venture
capital industry a success in Pakistan. Pakistan’s economy has yet to reach its full
potential and growth of the Venture Capital industry may help it reach this potential.
The country’s investment policies are generally recognized as some of the most
favorable in the region. In short, Pakistan presents a number of investment
opportunities that are supported by very favorable and rapidly improving conditions in
the marketplace.
Action Steps for promoting Venture Capital in Pakistan
(1) Removal of restriction placed on pension funds and insurance companies by
the SECP to invest in the venture capital sector.
(2) Government needs to establish a number of ‘seed-stage’ funds which will
facilitate start-ups and provide the necessary impetus to the sector.
(3) Lower ‘Minimum Capital’ requirement to set up a Fund Management
company (FMC) from US$ 250,000 to US$ 100,000 (in accordance with
international standards).
(4) Current regulations require FMC’s to renew their licenses annually, this
needs to be changed as FMC’s operate on long-term contractual
agreements.
(5) A secondary market (such as the NASDAQ) needs to be in place for listing of
smaller firms and their eventual IPO’s.
(6) Regional/provincial ‘business angel networks’ that are linked to emerging
venture capital funds should be created across Pakistan.
(7) Government should be involved in the monitoring of Intellectual Property
Protection rights implementation across the venture capital industry in
Pakistan as well as impose penalties on violations in this regard.
Key Policy Recommendations
(1) Although the Government of Pakistan has incentives in place for both foreign
and local investors in terms of tax breaks and smooth ‘exit’ options it can
provide additional support for the early stage or start-up businesses caught in
the equity gap. One possible approach to meeting this need might be a
variant of the Small Business Investment Company (SBIC) model in the US.
A Pakistan SBIC Program would aim to improve the availability of risk capital
to start-ups facing the equity gap, by bringing more ‘entrepreneurial investors’
into the management of funds which specialize in making small, early-stage
deals; offering incentives to make these investments; and enhancing the
impact of business angel networks.
(2) Govt. can help offer incentives to foreign investors by having a well
developed secondary stock market and an adequate supply of well trained
professionals especially at the ‘due diligence’ stage.
(3) Since the government has a lax attitude towards Intellectual Property
Protection rights violations international investors feel deterred and thus take
their investments elsewhere. The Government should be more proactive in
the implementation of this process.
(4) Focus needs to be placed on the demand side by identifying areas in addition
to IT, Telecom and media, where potential VC opportunities can exist.
(5) Lastly, a strong judicial system, reasonable standards of corporate
governance and an open economy with a large private sector presence
needs to be in place in order to make Pakistan an attractive option for VC
business.
Venture Capital Funding Opportunities in Pakistan – Some Sub-Sectors
Engineering Sector
Sub-Sector
Motorcycle Parts
Forgings / Castings
Agricultural Farm
Implements
Pumps / Motors
Textile Machinery
Rationale
Tremendous growth in sales of new motorcycles, potential for
catering to both OEMs and after market. Support needed for
technology transfer and selling in international markets
Domestic market especially the auto industry can be big
consumer, however large castings still imported. Technology
transfer & linkages can open up markets of the region
especially for use in the oil and gas sectors
Corporate agriculture will lead to greater use of mechanized
tools in agriculture especially important to reduce damage
through manual handling of agricultural produce. Technology
and marketing access issues
Country competitive in manufacture of pumps of lower flow
rates, support needed in implementing standards and access
to international market
Most equipment used in the processing industry is
manufactured locally. Support is needed in getting technology
which will improve efficiencies and allow newer processes
which are more environmentally friendly
68
Boilers for Home
Use
Sub-Sector
Seeds (Genetic /
hybrid)
Animal Feed
Silos
Cold Storages
Fruit Preservation
Dairy & Meat
Industry exists for gas boilers (geysers) however energy
losses a major factor hampering development. Technology
required in the areas of heat efficiency and controls to reduce
wastage. Option also to enter regional markets with boilers
which use fuels other than natural gas
Agricultural Sector
Rationale
Agricultural output stagnating, unable to keep pace with
population growth. Genetically modified seeds and
more disease and drought resistant seed required.
Linkages with international firms can provide the know
how needed
Animal husbandry suffering due to lack of proper feed
for mulch animals and animals reared for meat. Use of
proper feed can lead to Country becoming big exporter
of meat & meat products. Linkages can lead to transfer
of feed formulations
Crop losses due to non-availability of grain silos. Most
of the technology locally available, opportunity in
management of the silos
Significant portion of fruit and horticultural production
wasted due to non-availability of cold storages.
Specialized, product specific technology which will help
local growers to become part of international supply
chains
International market opportunities for dry and
persevered fruits not fully exploited. Opportunity for
improving both quality of the product and finding
international market access
Opportunity in organizing and managing animal
clusters, opportunity for supplying feed, veterinary
services and acting as conduit for output from the
clusters
Sub-Sector
Small Hydel
Power Plants
Energy Efficiency
Services
Bio Mass
Bio-Gas
Solar energy for
lighting purposes
Sub-Sector
Diagnostic
Centers
Tertiary Hospitals
Common
Industrial Effluent
Treatment Plants
Water Recycling
Energy Sector
Rationale
Tremendous opportunity for run of the river hydel
projects. Opportunities for setting up and managing small
hydel units in isolated communities
Energy efficiency services for both industrial as well as
domestic clients. Access to international best practices
and know how are the issues
Managing municipal dumping sites to produce electricity.
Developing supply chain for producing plants used as
bio-fuels. Opportunities in international linkages for
technology and local sources of raw material
Using manure from the peri-urban locations and utilizing
it for generating heat. Opportunities relate to
management of the manure collection and power
distribution
Replacing kerosene lamps used in rural areas with solar
powered lamps. Technology available at competitive
prices challenge lies in technology transfer and setting
up the marketing network
Health & Environment
Rationale
Demand for diagnostic, dialysis and other services exist
especially in the smaller towns and cities. Opportunity for
acting as collection centers for larger diagnostic centers
exists. High initial capital cost is major impediment
Pakistan is missing out on the worldwide medical tourism
boom. Opportunity exists for corrective surgery,
important to be able to use Pakistani Diaspora worldwide
to promote the service
International buyers especially in the textile sector
insisting on environmental compliance. Individual
effluent treatment plants very expensive. Opportunity in
setting up and managing common effluent plants
Domestic and industrial waste water recycling and
distribution for domestic and industrial usage.
Opportunity in managing this venture.
70
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World Bank and International Finance Corporation, 2007, Doing Business 2008
Pakistan : Comparing Regulation in 178 Economies , World Bank, South Asia
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http://www.gcr.weforum.org/
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