PAKISTAN ENERGY CONFERENCE 2011

WHAT WILL DRIVE FOREIGN INVESTMENT IN PAKISTAN?

Naved A. Khan Vice President, OICCI

10 12 April 2011

10 12 April 2011
PAKISTAN ENERGY CONFERENCE 2011

AGENDA
Role of Foreign Direct Investment (FDI) in the Growth of the Economy Role of OICCI in Attracting FDI Regional FDI Trend Business Climate in Pakistan FDI and Prospects for Pakistan, Trends and Challenges Reforms & Recommendations needed to Attract FDI to Pakistan
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10 12 April 2011 PAKISTAN ENERGY CONFERENCE 2011

Role of Foreign Direct Investment in the Growth of the Economy

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WHY DOES AN ECONOMY NEED FDI

The government correctly identifies FDI as a key source of economic stability & growth in its policy statements

Fuels Economic Growth

FDI more stable than equity and shortterm debt

Creates Regional & Global Linkages

Finances Growth Deficits Maintains Currency Stability Improves Trade & Current Account Deficit Access to Capital Markets is gained

Domestic investment responds positively

to FDI inflows

Creates Employment Opportunities Transfers New technology & Management Practices

FDI has a positive effect on savings and

investments

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Role of OICCI in Attracting FDI

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OICCI ROLE IN FACILITATING FDI IN PAKISTAN

1. Acts as a Catalyst to Investment by Showcasing the Success of Foreign Investors in Pakistan 2. Improves the Business Environment by Creating Benchmarks and Models of Global Best Practices 3. Helps Generate Business and Entrepreneurship through Investment, Technical Expertise, and Corporate Social Responsibility. 6. Identifies Major Bottlenecks Business and Growth that Hinder

7. Shapes a New Framework for Business Progress and Development 8. Networks with Policy Makers to Improve Business Opportunities and make Pakistan a Prominent Investment Destination 9. Highlights Key Factors Contributing to Enabling Government Policies and Regulations

4. Counters Negative Coverage in the Global Media, Improves the Countrys Image, and Builds Investor Confidence
5. Represents and Promotes the Interests of Investors

10. Works with the Government to Chart an Action Plan to Propel Investment and Suggest Revival and Reform Strategies

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Regional FDI Trend

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FDI TREND OVER 2008-2010

14% 100

FDI & GDP Growth (%)

12%

80 FDI in USD Billion

10% GDP Growth Rate %

60

8%

6% 40 4% 20 2%

0 Vietnam FDI - 2008 (LHS) India FDI - 2009 (LHS) Pakistan FDI - 2010 (LHS) China

0%

Avg. GDP Growth Rate 2008-2010 (RHS)

Source: State Bank of Pakistan

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RATIONALE FOR HIGHER FDI IN ASIAN REGION

China Most Attractive Destination was able to attract around $ 718 Bn in FDI over 2000-10 due to: 1. 2. 3. Investment of 14-15% of GDP on infrastructure High GDP Growth Rate (>8% since 1980s) Preference for big foreign firms that will set-up export oriented projects Foreign enterprises account for 57% of goods/services exported. Gargantuan Domestic (Consuming) Market.

4.

5.

Switch from Contractual JVs (partnerships) to Equity JVs and especially Wholly Owned Foreign Owned Enterprises.
Tax incentives began in 1980s foreign firms had to pay 15% tax against ordinary 30%. Qualified Foreign Institutional Investor (QFII) scheme in 2002 allowed approved foreign institutional investors access to China's domestic capital markets

6. 7.

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RATIONALE FOR HIGHER FDI IN ASIAN REGION

INDIA 2nd Most Attractive Destination was able to attract around $ 180 Bn FDI over 2000-10 due to:
1. 2. 3. 4. Investment of 5-6% of GDP on infrastructure Tax Exemption of INR 20,000 on Infrastructure Bonds Duty free imports of capital goods & raw materials for 100% Export Oriented Zones (EOZs) 100% Income Tax exemption for 10-years for EOZs (15-years for Industrials Parks set-up b/w 1977-2006.

INDIA 2nd Most Attractive Destination

11. Tax Exemption for foreign income earned by foreign nationals in India 12. User-Friendly Publications listing FDI Policies and Guidelines 13. Recognition of Intellectual Property Rights (TRIPS) Media Supervision 14. Trade Liberalization and

India has lost potential FDI due to:

1. 2. Imposition of Environment-Friendly Policies on mining, township and port construction projects. Imposition of 24% FDI-Cap in small scale industry

5.
6.

No FDI-Cap on GDR, ADR and Foreign Currency Convertible Bonds (FCCB).

Initially, investment in Public Ltd. Companies could not be transferred before 5 years. Now only 20% cannot be transferred. Promotion of JVs with ADB, IFC, CFC, DEG etc. Usage of simplified Automatic Route with 100% FDI allowance Cancellation of requirement to obtain industrial license to manufacture

7. 8. 9.

10. Industrial undertakings free to select location of project

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10 12 April 2011

Business Climate in Pakistan

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PAKISTAN BUSINESS CLIMATE

ATTRACTING FOREIGN INVESTMENT POTENTIAL & REASONS

AVENUES FOR INVESTMENT (SUNRISE)
Energy including alternative Energy (Wind / Coal / Hydel / Solar)
Corporate Farming Agro Based Industry

ATTRACTING FOREIGN INVESTMENT POTENTIAL & REASONS

Young Population (3rd largest in Asia; 2nd in South Asia) Geo-strategic Location (Hub for Exports to Central Asia) Small and Medium Enterprise Development

Increasing Number of Females in the Work Force Diversity of Language/ Religion/ Culture Modern and Emerging Financial Market

Minerals
Health /Pharmaceutical Infrastructure

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FOREIGN DIRECT INVESTMENT

INCENTIVES FOR FOREIGN INVESTORS

Implemented an advanced electronic data interchange system Intellectual Property Rights law in place Signed Double Tax Treaties and Bilateral Investment Treaties with 58 countries 50% Initial Depreciation Allowance

Foreign Investors can own 100% of a business in Pakistan

No restrictions on repatriation of profits or capital

accretions from shareholdings

Losses can be carried forward for up to 6 years for tax purposes, whereas 5 years is the limit in most countries No minimum capital requirements to start up a business, except for the services sector No limitations on hiring expatriate employees.

Source: OICCI sponsored study Competitiveness of Pakistan as a Destination for FDI with countries in the Region 13

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PAKISTAN ENERGY CONFERENCE 2011

FOREIGN DIRECT INVESTMENT

200 180 160

EASE OF DOING BUSINESS IN PAKISTAN

Ease of Doing Business - Asian Comparison
(Ranking out of 183 countries)

167
142 148

140 120 Ranking 102 100 80 60 40 20 1 0 2 18 19 21 33 78 79 83 116 107 121 123

134

Source: Doing Business Database

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FOREIGN DIRECT INVESTMENT

200

EASE OF DOING BUSINESS IN PAKISTAN

Ease of Doing Business in Pakistan

(Ranking out of 183 countries)

180
160 140 120 Ranking 100 83 80 65 60 40 20 0 Ease of Starting a Doing Business Business Dealing Registering Getting with Property Credit Constr. Permits Protecting Investors Paying Taxes Trading Across Borders Enforcing Closing a Contracts Business 28 98 Key Aspect for foreign Investors 126 145 155

85

81 67

Source: Doing Business Database

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FOREIGN DIRECT INVESTMENT

PAKISTAN vs. GLOBAL RANKING

Best Practices in Pakistan compared Internationally
Procedures Global Ranking (183 Economies)

Number of Procedures to Start Business Days to Start a Business Cost to Start a Business Number of Procedures to deal with Construction Permits Days to Deal with Construction Permits Cost to Deal with Construction Permits Number of Procedures to Register Property Days to Register Property Cost to Register Property Days to Enforce Contracts Cost to Enforce Contracts Days to Export Days to Import Cost to Export Cost to Import Number of Tax Payments Total Tax Rate Time to Pay Taxes

132 71 89

13
42 124 79 64 119 142 47 87 66 7 13 119 26

Hurdles to competitiveness

168

Overall Rank

83

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TRENDS IN FOREIGN DIRECT INVESTMENT

EASE OF DOING BUSINESS IN PAKISTAN

Ease of Doing Business in Pakistan over 2006-2011
(Ranking out of 183 countries) 83

90

85

80 77 75 Ranking 74 74 75

70 66 65

60

55

50 2006 2007 2008 2009 2010 2011

Source: Doing Business Database

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PAKISTAN BUSINESS CLIMATE

COMPARISON OF EASE OF DOING BUSINESS IN PAKISTAN

Major Countries in South Asia - (such as Bangladesh, Srilanka, Nepal)
Poor 20% Average 52%

Emerging Markets - (such as China, India, Vietnam, Hong Kong & the Middle East)

Good 8%

Poor 40%

Average 61%

Good 19%

Only 8% of members prefer Pakistan in comparison to other emerging markets Pakistan considered to be a better environment as compared to other countries in South Asia by only 19% of members

In comparison to 2008, Pakistan's perception has improved significantly, as the disapproval ratings have been reduced
Source: OICCI Perception Survey Report 2009

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TRENDS IN FOREIGN DIRECT INVESTMENT

FDI TREND DURING LAST 10 YEARS

Foreign Direct Investment
(In USD Million) 12.0%

7,000

6,000 5,410 5,140 5,000 In USD Million 9.0%

10.0%

8.0% 4,000 7.5% 3,521 3,720 6.8% 6.0% GDP Growth %

3,000 4.7% 2,000 3.1% 1,000 798 485 1.2% 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 8MFY11 0.0% 949 1,524 5.8% 3.7% 4.1% 990 2.7% 2.0% 2,151 4.0%

GDP Growth % (RHS)

FDI (LHS)

Source: State Bank of Pakistan

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PERCEPTION OF OVERSEAS INVESTORS

TOP CHALLENGES TO CURRENT AND FUTURE BUSINESSES IN PAKISTAN

Challenges to Future Business
(Rank 1 refers to Biggest Challenge)

1 2 3

4 5 6 7 8 9
Law & Order Energy Deficit Government Stability Infrastructure Cost of Operations Legislation Human Resources Copyrights and Changing IPR Social Values

Source: OICCI Perception Survey Report 2009

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GENERAL BUSINESS INDEX SURVEY

CRITICAL ISSUES
Critical Issues to Resolve Today
Survey of Manufacturers (45%), Retailers (25%) and Services (30%)

35%

30%

29%

25%

20%

15%
15%

15%

15% 13% 7%

10%

5%

0%
Poor Governance Inflation Corruption Power Crisis Law & Order Politician

Source: Business Confidence Survey Quarter 3, 2010

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Reforms & Recommendations needed to attract FDI to Pakistan

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CRITICAL STEPS REQUIRED

In the face of stiff competition from other emerging economies, and considering regional concerns, it is critical that Pakistan : Enhance the perception of Pakistan Energy deficit needs immediate resolution Law and Order Fiscal discipline required Tax to GDP Ratio needs to be enhanced to 15% within 3-5 years Government needs to initiate comprehensive dialogue with major stakeholders/ bodies to achieve fast turn-around Ensure implementation of policy and recommendations

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CRITICAL STEPS REQUIRED

Create single access point for all tax registration and for social security requirements Simplify Tax System Provide incentives for local governments to develop a local tax base Set-up Specialized Courts or Commercial Divisions in Existing Courts Strengthen Alternative Dispute Resolution (ADR) System Human Resource development plan

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THANK YOU

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