Najma Minhas Managing Editor Global Village Space sat down with Haroon Sharif Minister of State and currently holding the charge as Chairman Board of Investment (BOI), to understand Pakistan’s investment picture, what are his objectives and how he intends to bring investors into Pakistan.
He is a distinguished expert on economic policy with over 30 years track record of working in both the public and private sector and international development institutions. His most recent positions were as Senior Regional Advisor (South & Central Asia) to the World Bank and as the Head of the Economic growth team at the Department for International Development (DFID), UK. He has also served as the Executive Director at the SECP and earlier held positions as CEO of financial institutions.
GVS: Why should someone invest in Pakistan? Sell Pakistan to us.
Haroon Sharif: At this point, globally because of the uncertainty and flux in the world, investors are looking to diversify their portfolios, so there is much liquidity looking for a new house. The tussle between China and the U.S. is making investors nervous, and the same in Europe and the UK due to Brexit tensions. Investors are genuinely looking for new markets in Asia.
East Asia itself has surplus liquidity; Pakistan having stabilized its security situation, is a market people are interested to invest in. China has put us on the map. Initially, Pakistan was not even on the investment map, but now they are all intrigued, that if one country (China) is taking so much risk, there must be something positive about Pakistan.
So on the macro level international interest in Pakistan is being driven by that global flux. Furthermore, as opposed to those who argue that Chinese investment in the country is strategic, my understanding from engagement with the Chinese and those bringing in the investment is that the prime driver of China’s interest is commercial.
Strategic maybe part of their calculations, but I think they are actually looking at corporate profitability here. Pakistan is a market where the average age of a person is 23 years and out of 200 million people, over 100 million are earning hands. So it is a huge market, very attractive for anyone wishing to diversify.
So commercial banks cannot do these projects, because not only that they have more costly capital, but it is also short therm capital, so there is a mismatch.
In the past, the security situation made it a difficult market to consider for investment, however, now the perception of security has dramatically changed. Domestic tourism for instance in the Northern Areas, shot up by 500 percent last year. They ran out of food, rooms, gas, everything.
The average number of tourists in a year used to be 15,000 people. Make a guess how many people came last year… 500,000! Now, where would this 500,000 people go and stay in one year? This is what happens when perception changes. Now imagine, in another three years InshaAllah, western China will be connected to us.
China is systematically investing big money in western China to spread its population base, as over time their migration patterns have become increasingly eastern. Western China plus Pakistan offers a market of 400 million people to investors! Even forgetting Afghanistan and Central Asia for a moment, who would ignore a market with a decent consumption power of 400 million people?
So I think that is a very clear selling case of the market as a whole. Now let’s talk about the endowment. In Pakistan, we are currently standing at a low base since no one has leveraged anything. We are selling basic commodities. We do not produce cheese from milk. We have not been able to explore our mineral resources. We have no land bank, where we could leverage land for farming. Landholdings themselves in terms of property rights are very weak.
Ease of doing business in Pakistan is an issue, here an investor pays 47 taxes whereas our competitor in New Zealand has to pay one tax. So if you are an investor, indirect taxation is another hurdle.
Our people’s skillset remains limited. We have never looked at our ocean territory as an economy. Countries have beaches and resorts and rake in millions from developing those; we are yet to even open a lakeside restaurant in Islamabad to this day. So in short, our baseline is very low, short of ideas, short of capital, short of technology.
Investors sitting outside have some innovative ideas we could implement like e-waste management; a process that encourages the recycling of old cell phones and chips. So in Pakistan, the opportunities are so numerous compared to what we are doing right now, that whosoever gains first entry will gain prime first-mover advantage.
At this time, we have a lot of foreign automobile investors showing interest. Recently, I got a letter from Volkswagen, they are planning to assemble cars in Pakistan. We are inaugurating a Chinese venture for electric cars in Lahore.
Apart from that, we are also looking at Renault and al-Futtaim, they have a plant in Faisalabad and production will begin by the end of 2020. The Koreans are also interested. All of these companies are looking at the consumer market. Thus, Pakistan’s consumer market is attractive and if security and stability remain it will be ready for take-off.
GVS: Is this the kind of investment Pakistan needs?
Haroon Sharif: That is the question posed for a public policymaker. It is one thing for desperation to exist, where we call investors in because we need money. Our investment to GDP ratio is 15%, India’s is 30% plus and we need at least 20% if we wish to reach 7% economic growth. Our target is 25 percent for next 5 years. But where do we exactly need investment? The policy framework has to be very clearly steered.
In East Asia, they directed their investment towards their priorities. In Pakistan, we have generally followed the neo-liberal argument and left it to the market. If I am [a policy maker] in Pakistan, I would direct investment in four macro categories. My first priority is an investment in industrial production rather than setting up a shopping mall or a McDonalds.
And I am talking about capital investment, not hot money or stock market investment. I am not looking at consumption-led investment, I am looking at investment which actually generates a product. So number one is the productivity of that investment. While all investments will create jobs, the point is if you are creating something you need to export it.
Cars will not be exported, so an investment in the automobile market will generate jobs and introduce technologies but not generate the foreign currency which you need. My second priority is increasing exports. I told Huawei to assemble their phones in Pakistan, and export them. While they have agreed, we have to formalize that agreement.
Our target for the next year is to be among the top 100 countries on the ease of doing business index. That means we are lookng at a thrity-six point increase, which is a huge target.
It makes perfect sense for them since our engineering base or the average cost of an engineer is half the cost of a Chinese or Indian engineer. So we have a competitive advantage. Graduates of GIKI, LUMS, and NUST are absolutely at Asian standards and with a little bit of training, our private sector universities can create good engineers within Rs. 250,000.
With the standard 5 years of experience, the same engineer would cost China Rs. 600,000. So they are at advantage if they assemble things here and take it back to their own country or sell it somewhere else. We need to increase our exports to break out of the IMF cycle but it will become costlier to add value to our products.
Third is technology transfer where investors are not just bringing capital in but also emerging technology as well. Through this, we can start modernizing our industry. Finally, we need meaningful job creation. If we steer foreign investment, within these parameters, it will remain sustainable.
Investment funds are ‘cowardly’, if they go into franchising or consumption or go into imports, it would become very dangerous, in that it would impact negatively on our macroeconomic stability. This is the overall picture of investment as the way I see it.
GVS: So, what are the obstacles you are facing in implementing such a policy?
Haroon Sharif: Productivity is the first hurdle, it is not simply people’s productivity to deliver, but at all levels. Massive human resource investment is needed. Labor might not be our advantage in the medium or long term since we need a change in skillsets.
Because industry in the future will be robotic, so the manual laborer will have to learn more about machines. Our institutions are not tailored to deliver. Our managerial capability to implement a transaction is very low. Both at the state level of policy capability and within the private sector.
In the policy sector, the lack of capability begins from the point of feasibility studies to taking it to a financial close. So the basic hurdle is the restricted capability. Ease of doing business in Pakistan is an issue, here an investor pays 47 taxes whereas our competitor in New Zealand has to pay one tax. So if you are an investor, indirect taxation is another hurdle.
On every step from registering a company, to a certificate of incorporation, to land acquisition, it is a nightmare to get a clean piece of land if someone is investing in a big project. So among the hurdles, these are the regular operational hurdles. However, there are also several structural hurdles.
My hunch is that contract enforcement and property reights are the main issues in our country. If an investor is not physically present here, they are not too sure if their inestment is secure in terms of property rights.
Our financial market is just not ready to support industrial growth because we do not have long-term capital available. So commercial banks cannot do these projects, because not only that they have more costly capital, but it is also short-term capital, so there is a mismatch. For industrial development, you need long-term 15-20 years duration of structural financing, which is not there.
Our primary capital market is dormant. Neither do we have corporate bonds, nor mortgage financing instruments, nor SME (Small and Medium Enterprises) financing instruments; we do not have venture capital or risk capital at all. Major reform is needed in the financing market – there is an over-reliance on funding (80-90%) from commercial banks.
Pakistan’s physical infrastructure is decent, but the investment also needs other supporting infrastructure. A lot more needs to be done on the regulatory, policy, financial and human resource infrastructure. The government needs to work on these issues in order to create an enabling environment, such that if you are an investor you would feel comfortable both coming in and exiting the market.
Now let’s discuss the private sector. The private sector has not invested in innovation. Our products are pretty basic. For instance, in textiles – lawn is still being sold – not readymade suits. The private sector has not needed to pay attention to exports since they are all making a lot of money from domestic consumption.
Thirdly the private sector is still family-owned. We do not even have one multinational corporate in the real sense. The private sector hasn’t worked on human resource development or managerial capability. So as per an ideal model, the public and private realms need to work together.
GVS: How will you push the private sector towards this?
Haroon Sharif: I think by opening up to the competition. You will have to tell them to compete among their regional peers. This will force them to go into value addition.
GVS: But they are already facing huge amounts of competition from Bangladesh and Vietnam?
Haroon Sharif: They are not competing in value-addition. Bangladesh buys your lawn to make and sell its shirts as exports. So if you don’t have the skillset to stitch a decent shirt, you will continue selling lawn which we call ‘grey cloth’.
We need to change incentives in such a way, so for example, if you are providing gas subsidies – in a zero-rated industry – there will be more incentives if they export value-addition goods versus basic commodities. This will force manufacturers into value addition.
We are the fifth-largest milk producing country, yet we do not produce cheese or chocolates, not even candies. In textile, value-added textiles exports such as denims and jeans are only 10%, while 90% of exports are grey cloth.
Our light engineering sector needs to stand up where we have the advantage; such as assembly of electronics in comparison to making chips or computers. In the IT industry, China and India have progressed further up the value chain. There is a basic market vacant for Pakistan to move into. So I think these are the sectors of technology which we should develop.
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GVS: In terms of foreign investment, which countries are you focusing on?
Haroon Sharif: Looking at the investment pie of Pakistan which is about 15 percent of the GDP, it roughly stands at $50 billion. Only $3 billion is from foreign direct investment. The remainder around US$ 47 billion, is domestic government and private sector. Increasing FDI brings in foreign exchange reserves and you get technology.
Local investment does not bring technology. Now to answer your question, at this time the countries that know Pakistan are our best bet. Who were looking at Pakistan but thought “Oh, this place is not stable, so I am not going there.” The Chinese obviously were the first ones to come in a big way.
For now, there are only two regions in that category; Saudi Arabia and the United Arab Emirates both have shown very keen significant interest in long-term investments in Pakistan, and potentially the Far East countries such as Malaysia. We are very open to the E.U. and others but more from a knowledge side.
Where surpluses are concerned, it is the century of Asia, we need to look at these two regions. If we tap into Malaysia, Korea, Japan, Thailand and the Gulf countries alongside China this is enough for our current absorptive capability.
GVS: In what areas are investment expected to come from in East Asia?
Haroon Sharif: I can give you concrete examples. First of all, let us talk about Arabs. Their strongest market is petroleum – so they are looking at refineries, petrochemicals, power plants, renewable energy. So specific projects have come up from large companies like Aramco, Aqua Power, ADNOC, NuStar, DP Vert.
Basically, those who know their job and are doing it. Now the Board of Investment is working on feasibilities and connecting those concerned. The liquidity is not an issue, but rather our capability to absorb. As for East Asia, they are really IT savvy. They are looking at the IT sector because they can outsource a lot of business here.
In addition, they are looking at our minerals and gemstones among other things, they already have clients in East Asia who want to source things from here. I did not know they would be so keen about Pakistan’s gemstones – but we have already received three to four requests. They are even willing to invest in the tourism sector.
GVS: What kind of numbers are we looking at?
Haroon Sharif: For the Arab countries, I can safely say we are looking at $15-20 billion worth of projects over a period of five years. The refinery alone is worth $6 billion in the short term, which everyone is talking about. As for Malaysia and the rest, I am looking at investment in the range of $10 billion in various projects.
For instance, they have immense experience in hoteling. If you look at East Asia their hospitality industry is famous globally. In Pakistan we have neither resorts nor the requisite trained people, we could immensely benefit from their inputs.
GVS: Is the diaspora community in your radar? Are you looking towards them to raise funds?
Haroon Sharif: Diasporas are an asset. God has blessed Pakistan with plenty endowments, so we have to build our capability to leverage them. Every day three to four people come and see me from the diasporas who are passionate about helping Pakistan and they come with great ideas.
Frankly, we were not prepared for that. Now some of them are looking for feasibilities; some are looking to access a sector; some would be requesting a partnership. Currently, we are looking at the ultra-rich diaspora, who are serious investors and our strategy with them is one-to-one. We are looking at their investments, to facilitate them within the housing sector, the tourism sector, or IT sector, whatever they are interested in.
Most of the interest is driven from the UK, which has the largest western Pakistani diaspora of course, but other European diasporas such as Norway and Italy are also showing interest. Italy has more than 100,000 Pakistani diasporas and some are doing well enough to buy Italian companies. They are interested in expanding here.
GVS: Have you put any numbers on how much you are expecting from them?
Haroon Sharif: Not yet. We are gauging the interest and potential investments first from the big boys of diasporas; we are listing all the requests and taking it from there. Secondly, we have small and medium enterprises and people who just want to do something good in Pakistan.
So for the latter, I am creating a window for impact investments, and also perhaps in the second phase a semi-fund where they can invest in the constituencies they belong to. The government will only work as a facilitator, bringing in the best corporate governance structures to manage their money so that trust is built.
We are looking at two instruments from the investment perspective. From the debt perspective, I think the ministry of finance is looking to float a bond. I am also looking at diaspora to do managerial volunteering. If someone wants to come to Pakistan for a period of time to help – we value their skills and I am working on getting them placed in the industry.
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GVS: How are you tapping in on these kinds of individuals?
Haroon Sharif: I am already in touch with Pakistani embassies across the world who have lists of such people. We will also publicize this further – circulate something for instance; if you wish to come back to Pakistan for an internship.
We will target the top ten universities where Pakistanis are studying and help them to arrange internships in Pakistan. Later, when they go to work for Fortune 500 companies, they will be my future investors. So I am trying to launch a program like that.
GVS: You launched in October a hundred-day improvement on ease of doing business. Where are you on that?
Haroon Sharif: Pakistan has improved eleven points this time around, so the direction is there. Now we are launching our strategy for the next year and our strategy for the following three years. Our target for the next year is to be among the top 100 countries on the ease of doing business index.
That means we are looking at a thirty-six point increase, which is a huge target. The prime minister is personally steering this. I am absolutely clear we will handle federation related issues involved in ease of doing business, whether linked to FBR, SECP, SBP, and other institutions.
However, in the post 18th amendment, true business takes place in the provinces where land and utilities are needed. Now if business takes place in SEZs (Special Economic Zones) federal government will have the ability to do what is necessary. But, for the local businesses which are not in SEZs, we are looking for champions in the provinces to lead that effort.
At the provincial level, SEZ’s fall under the chief secretary’s office and the planning ministries, because these are the ministries which deal with it. For instance, out of the 47 taxes, one has to pay, almost half are provincial, and then there are some at the district level, on these the FBR is not in control now, the province is.
My challenge now is to deal with multiple agencies. So in ease of doing business, that is our target, but at the same time, I will give you a caveat. These indexes do not necessarily bring investment. They are basically meant to push you towards reforms. But, I want to go ahead of that, I am now trying to find out what are the actual issues faced by the big or medium investors.
It might be cultural; it might be contract enforcement or the judiciary. We really have to figure out what the main issue is. My hunch is that contract enforcement and property rights are the main issues in our country. If an investor is not physically present here, they are not too sure if their investment is secure in terms of property rights.
For that, we need to strengthen the civil agencies and law enforcement agencies and their work so that people can have trust. We are pretty good in terms of IT and bank services, on that end, there is no such issue. Long-term financing maybe like I said, but that is however not the major hurdle. Infrastructure is decent in this country, road networks, etc.
Connectivity is however very weak with other countries. We have issues with physical connectivity due to conflicts on the eastern side, so there is no trade. On the western side, there are stability issues. So if these get better, then it is a win-win for all. Flight connectivity is very weak; buyers for textiles arrive in Delhi not here. So we need to look at these issues as well. For now, only western China is visible to me on the horizon.
GVS: You have done a number of roles before becoming Chairman of the Board of Investment. Is there any particular role that has really helped you in adjusting to this particular position?
Haroon Sharif: I think multiple roles have helped me. My work in the donor organizations helped to get an idea of how the international community or international organizations operate and how they look at Pakistan. In the private sector, you get to know that at the firm level what the issues actually are.
Academia teaches you the analytical part and when working within the state you find out how disconnected some of the things are with the realpolitik of state. So I am very blessed in the sense of my diversified experience. If I had been doing one job for 30 years, then perhaps I would have been an expert of that particular sector.
But this exposure and networking helps you a lot. I can pick up the phone and call a finance minister who was my colleague in the World Bank and ask him, “How did you solve that particular issue in your country?” In regards to ease of doing business, I am already calling my former colleagues and asking them, “Tell me what did you start with?”
Similarly, in the private sector, I could go back and say “You had five factories, why are you moving to shopping malls?” You know, let’s talk! At least bringing them on the table is step one. I am very pleased that the prime minister made a Council for Business Leaders because the Economic Advisory Council helps you with public policies while the former tells you “this is my problem”, or “here is the broken chain”, or “there is bribery going on here”.
For a foreign investor, their interaction with you starts the moment he or she lands at the airport. Someone gave me an example recently; it was a top company, a cricket ball company in the UK came to meet their supplier in Sialkot.
The Sialkot supplier gave them some of their best cricket balls as samples to take back, but when they were leaving, the customs officers ‘doing their job’ drilled holes into all of the balls! So this training of ours, to actually deal with businesses and give respect to businesses, still needs plenty of work.
GVS: What have you set as a target for yourself to achieve in the next five years at the BOI?
Haroon Sharif: In the first year, I want to pull through some key transactions, so that people get the confidence they can do it. Confidence is not sold at the tuck shop, so I am very keen that a few deals materialize, this will create a momentum that we can do it. I mentioned the French car manufacturer as an example or the Saudi refinery.
So if I manage to bring it to this step that people start believing that this can be done, that is my first achievement. At the same time, the role I have set for myself is that I need to support the prime minister to ensure that ease of doing business in Pakistan is improving.
But I need to start influencing economic policy; that is my medium-term goal. I need to build this office which is currently only for promotion and facilitation – if you are an investor, we guide you and connect you – it is more of a crudely speaking a sort of ‘event management’ shop or you may say a ‘project-management’ shop, but we need to move towards it being a place where we can give you considerable technical advice.
Currently, we have a very fragmented structure of policymaking, the textile ministry is busy making its own and so is every other ministry. I need to be able to tell them that your policy is not ‘investment-friendly’, same with the FBR on its fiscal policy, and the State Bank on the credit policy.
GVS: But what you are asking for is that not going against what the government is now doing? For example, you mention the FBR, but the government is splitting it into an implementation arm and taking away its policy-making ability. You’re saying “give me the policy.”
Haroon Sharif: I am not saying give me the policy. I am saying; seek my advice in making your policies investment-friendly and keep directing investment in your real sectors. If the government makes a policy that it is going against what business needs, I need to immediately say that change this and that and for that, I need to have an evidence-based technical capability here at the Board of Investment.
That is something that I will be building in the medium term, so I plan that my team be sufficient enough that they understand the corporate balance sheets, to analyze themselves rather than saying we are a post-office connecting you with somebody.
The one window concept is what I want to eventually bring to the BOI, so for example, I want to bring company registrations from the SECP here. If someone comes to me why would he need a form from SECP when he can get one electronically? So my shop should immediately offer to register them on the spot.
So these are some of the short-term and medium run changes I want to work on, but eventually, the goal is that the country’s investment to GDP ratio increases. My other major target is that if I can make some mechanism for institutional coordination so that provinces and federation and line ministries start working. My ultimate and final goal would be that the foreign ministry becomes my Ambassadors.
Commercial officers abroad are currently trade-focused, but, Mr. Razzak Dawood has offered that BOI should also use them for increasing investments. However, the serious investor or CEO usually wishes to speak with the ambassador. So we are actually very keen that our ambassadors get into this economic diplomacy as one of their performance evaluations.
We will support them and already I am getting a positive response from a few ambassadors. They call the shots in the embassy; they can connect investors with the people back in Pakistan.
My eventual goal is I do not want to spell it outright, but many countries have merged their foreign offices with commerce ministries and economic ministries. Pakistan is not in that state of affairs but at least if economic diplomacy becomes a mainstay of your average diplomat, then I think that would be an achievement.