How not to get investment

09 Mar How not to get investment

There is a positive, mutually beneficial way of maintaining investments that come in. Then there is the Pakistan way. Part of my work involves advising an UNCTAD-affiliated international Investment promotion agency, and when collating some of the most active investment promotion fronts, India keeps popping up. The Modi government, via foreign trips has bagged USD 30.9 billion in investments only last year. This is phenomenal, especially if they can keep their investors happy even after they set up shop. That is the defining difference.

In Pakistan, even the businesses established decades ago are not just battling not day-to-day operational woes but also regulatory ones. Here bringing in investment is not as much a task as is persuading them to stay. Take for example Pakistan Tobacco Company.

Economic research shows over-regulation just doesn’t work – It deprives the government of valuable tax income; people still trade in just as much quantities if not more and the black market flourishes. Applied on the tobacco industry via regulatory harassment, the detrimental effects are only compounded. People end up buying illicit, more harmful products that escape the tax net. It makes complete economic sense to streamline the industry with more support, not less. With more support it gravitates towards what the developed world has taken up in harm-reduction technologies. Economic sense is difficult to prevail when appeasement and quick point-scoring is on the agenda.

The loss is ours. The company has other options – several countries where it has operations and several others where they can set up with better terms. Let us consider the opportunity cost. Illustratively, companies like PTC have paid 250 billion rupees in the last 5 years alone. This includes excise duty, income tax, sales tax and custom duties. Over 40,000 people are employed in its manufacturing set up and over 110,000 on the retail side. That totals up to contributing to the livelihood of millions. It is hardly about these numbers though. Truly it is about the sophistry that markets gain when multi-nationals set up shop – the backwards and forward linkages that are formed when cutting-edge processes are introduced and trade is modernized. And then there is the Corporate Social Responsibility (CSR) contribution. With 400,000 people helped though the mobile dispensaries and over 62 million saplings planted over Pakistan, the muscle Pakistan can ask the giants to flex for the development of the country are astounding. This can however be done if the governments are not antagonistic, but actually work in collaboration with these companies.

It is high time that we stop the turbo-policing of our most lucrative brands, and let the markets self-regulate. By all means levy duties on it to deter use, the end result will be the same – people will do what they want to do, consume what they want to and find ways to replicate more harmful prototypes of it. Economist Mark Thornton researched Government’s knee-jerks carefully and concluded that hyper-regulation creates incentives for producers to inevitably increase the potency of products distributed through black markets.

The fact that these companies operate is a miracle in itself – marred by chronic load shedding, insidious inflation and a volatile law-and-order situation. Pakistan hasn’t been that lucky with the rest. The list of those large multinationals exiting the country is both long as are its repercussions extensive: Singapore Telecom, British Petroleum, Chevron, AES Corporation, GDF Suez, and the Royal Bank of Scotland (RBS) and HSBC have all left.

With HSBC leaving it is evident that the banking policies in Pakistan are investor-repellent and ill-thought out. Bankers speak of large businesses shifting resources abroad to fetch better rewards and more security. Although it can be argued that banking is to investment what a stalk is to a wheat shaft, the real issue is not so much that our investment’s support structure is cut to size, but that there is a continuous disregard for the existing businesses that hold together the economy despite the odds.

In the case of post-spill British Petroleum, it is the exorbitant local taxation that choked the giant and made it pull out of unprofitable regions. US-based Chevron also exited in 2012 and when they did analysts hoped that it will trigger better regulation of the oil industry. That didn’t happen. We are not slaying Goliaths here, our bureaucracy is the oversized fattened pocket slinging whatever corporation tries to grease the wheel of the economy. The bad news is that there is no David in sight.

Investment can and will only flow in when established businesses continue to contribute to the economic development of a jaundiced industry. No new investments can be pooled in from faraway lands unless the local industry is governed with equity and much-needed regulatory support.