A chat with the Chairman of Board of Investment, Mr. Saleem H. Mandviwalla on the current situation of foreign investment and the effect of Budget 2010-11 on it
The Effect of the Budget on Foreign Investors
The current budget is not related to the foreign investment. The energy crisis is the major problem after law and order in decreasing foreign investment in the country. Apart from the budget, the investor policies should also be altered. There are some foreign investors who want to invest inPakistanand are only waiting for policy implementation. They have investment plans especially in the energy sector as the demand for energy is constantly increasing. The era of budget is over and it has been reduced to an academic exercise. In the past, the budget was followed the entire year. Now after every few months, the government makes amendments in the budget and announces a new one according to the changing requirements of the industries.
The only point in the budget which is businesses friendly is that the equity based investment is now tax free for 5 years for both local as well as foreign investors. Businesses, who invest through board of investment, are usually organized businesses which involve funding. It is very rare that a large equity based investment is made. The impact of this will be more on unorganized businesses who avoid paying taxes and will not be inquired about the source of their investment.
Misconception Regarding Foreign Investors
It is common thinking that foreign investors investing in Pakistan make all the profit and take it outside the country but in reality very few foreign companies are doing so. This situation only occurs after 10 or 20 years from the establishment of the business. I believe that foreign investors do not enterPakistanfor the sake of profit but actually enter this market for expansion. Pakistanis relatively a smaller market as compared to other countries but nevertheless is still a part of the international expansion plan. Foreign companies want a strategic presence along with expansion and aspire to add to the company’s turnover. For instance, it is assumed that McDonald’s, an international fast food chain located in Pakistan is earning profit but actually, a local investor who has purchased the chain is earning profits. The McDonald’s international head office is only expanding their operations. Similarly, Pepsi is only a brand name and all the bottling plants of Pepsi inPakistanare established and run by local investors. Jobs are being created from these kinds of international brands and more money is being circulated in the economy.
The actual target of international brands is to grow their business and increase their product lines. The difference between Pakistani businessmen and foreign businessmen is that the local investors want profit as soon as possible while the foreign investors first grow their business, and then expand the size and make profit.
The only way to get smart is to face an opponent who is smarter. The local industry is usually afraid of foreign industry as they are large and well established in comparison. Once the local industry faces competition in the market, it will also have to raise the standards and qualities to compete which at the end of the day will be highly beneficial to the local industry. Certain groups inPakistanmake policies with the government in such a way which restricts foreign investors to enterPakistan. In this way, the local industries will have to face less competition.
If we make policies which will allow more investors to enterPakistanin different industries, everything will become cheap after a few years. The Telecom sector ofPakistanis the main example. As soon as Telenor, Warid and Zong entered the market, the call rates dropped. Before this, the market was ruled by Mobilink and the customers were charged high rates.
So to increase the quality and quantity of our local products, we’ll have to allow foreign companies to enter Pakistan and the government should solve the problem of energy and law & order.