Pakistan: An Introduction
With its geostrategic location, positive economic outlook, increasingly large urban workforce, fiscal incentives and liberal foreign investment policies, Pakistan remains an interesting foreign policy investment option. The country’s consistent policy developments aim to provide a comprehensive framework for creating a conducive business environment for the attraction of foreign direct investment (FDI).
Although Pakistan presently faces a current account deficit and export demand crisis, the country’s gross domestic product (GDP) reached US$283.3 billion by June, 2019 and is expected to grow by 3.3% in FY2020. It is presently a top-ranking country in South Asia for private infrastructure investments and also remains one of the world’s top destinations for private participation in infrastructure (PPI) investment.
Telecom and E-commerce
The telecom and e-commerce sectors and the digital economy of Pakistan have continued to grow over the last few years. The broadband penetration increased from 32.39 million in 2016 to 76 million in 2019. A key development in the telecom sector is the completion of the Pak-China Optical Fiber Cable Project under the China Pakistan Economic Corridor (CPEC), which gives China an alternate and shorter access for transit telecom traffic to Europe, the Middle East and Africa.
Pakistan’s digital economy has immense potential for growth with mobile penetration of 77.69 percent and mobile broadband penetration of 36.18 percent. The Government’s commitment to drive sustainable economic development is demonstrated though its Digital Pakistan Policy which sets a specific goal to “generate sustainable innovation, entrepreneurship and employment opportunities for the Nation’s rapidly growing generation of technologically sophisticated and entrepreneurial population.”
In cognizance of the global developments in digital trade, the Ministry of Commerce has issued a Policy Framework to deal with the regulatory regime, payment infrastructure, logistics and taxation issues related to e-commerce. The Ministry of Commerce has also formulated an “e-Commerce Policy Board” under the chairmanship of the Minister of Finance to monitor progress and facilitate cross-institutional efforts. The rise of online platforms in the private sector has made the e-commerce market of Pakistan lucrative for foreign investment in the digital sphere. Successful ventures include Alibaba’s acquisition of Daraz.pk, Alipay’s acquisition of a large stake in Telenor Microfinance Bank Limited to further scale up e-wallet operations of Easypaisa – Pakistan’s largest branchless banking platform, owned by Telenor Microfinance Bank Limited and Careem, which has raised an investment of US$60 million. The world’s largest e-commerce company, Alibaba, has continued to show interest in the Pakistani market by signing an MoU with the Trade Development Authority of Pakistan to help bring small and medium enterprises in the realm of the e-commerce platform. The estimated size of Pakistan’s e-commerce market falls between US$60-100 million (2015) and is expected to grow up to US$1 billion by 2020.
A serious interest in developing and encouraging a shift to efficient electronic payment systems has also been observed. To this end, the State Bank of Pakistan has launched new Regulations for Electronic Money Institutions to allow non-banks to issue e-money instruments and more recently in November, 2019, the State Bank of Pakistan has published its National Payment Systems Strategy (NPSS). The objectives of this National Payments System Strategy are to “make recommendations to design a National Payments System complying with international standards and best practices, and tailored for the specific circumstances and needs for a safe, efficient and inclusive National Payment Systems in Pakistan”. The NPSS is aimed at boosting Pakistan’s GDP growth to 7% and creating 4 million jobs in the country thanks to customers migrating to electronic payment system.
Infrastructure and Energy Sector
FY 2019 marked a profound milestone in the development of Pakistan’s programme for renewable energy resources, as 11 privately held independent power producers (IPPs) achieved financial close for their proposed wind power plants. These wind projects are slated to add a staggering combined capacity of more than 500 megawatts that will help deliver green and cost-effective energy to the whole of Pakistan.
It is expected that approximately $800 million will be invested in Pakistan in connection with the new wind power plants, including financing from leading foreign financial institutions such as IFC, CDC, FMO and ICD. These projects are envisaged to come online by year 2021 and will be built in the Jhimpir wind corridor in Sindh.
On the infrastructure side, the implementation of CPEC in the past few years has been an instrumental driver for economic development in Pakistan. To further its objectives, the Minister of Planning, Pakistan and the Chinese Ambassador to Pakistan jointly launched the CPEC Long Term Plan which will stay effective until 2030. The Plan provides macro guidance for the implementation of CPEC and identifies key areas of collaboration including but not limited to energy, infrastructure, connectivity, trade and financial cooperation.
Presently, there are 22 active, proposed and potential CPEC projects relating to the energy sector, out of which financial close has been achieved for 15 projects. The Sahiwal coal power project with an installed capacity of 1320 MW was completed in a record time of 22 months and started operating in 2017. Additionally, Engro successfully commissioned its 660 MW coal power project in July 2019 and Shanghai Electric’s 1320 MW coal power project is in advanced stages of development. Given the recent achievements on the generation side, government policies are expected to shift their focus towards the electricity transmission and distribution sectors.
Work on establishment of a special economic zone at Dhabeji, Sindh has been commenced as a priority project under the industrial cooperation phase of CPEC. The Government of Sindh has invited proposals from investors to develop and operate Dhabeji special economic zone which is spread across 1530 acres of land. The zone is expected to generate employment opportunities and boost exports. Additional special economic zones are being developed across the country in Islamabad, Karachi, Gilgit-Baltistan, Khyber Pakhtunkhwa and Punjab.
Corporations and Capital Markets
Significant strides have been made in developing and promoting the corporate and capital markets in Pakistan. The beginning of FY18 was marked with revamping of the country’s corporate laws through enactment of the Companies Act, 2017. The main focus of the new law is facilitating the corporate sector, strengthening the regulatory framework, maximizing the emphasis on the use of technology, abolishing unnecessary requirements, protecting the interest of shareholders, and creating a softer regime for companies.
A similar trend continued in FY19. To promote an environment of investment and to encourage business start-ups, various initiatives have been undertaken by the Securities and Exchange Commission of Pakistan (SECP) including amendments in private equity and venture capital regulations, draft equity crowdfunding regulations, launch of a startup portal, setting up a CRO (Company Registration Office) facilitation desk and launching of the first regulatory sandbox in Pakistan. According to the SECP, the said initiatives are “in-line with the government’s initiative of ease of doing business and increasing access to finance and to facilitate private equity investments”. Recently, JS Investments Limited (an Asset Management Company) has also been authorized to launch a venture capital fund designed to invest in technologically-oriented startups and SME enterprises in Pakistan.
Another major development during FY19 included the Financial Institutions (Secured Transactions) Act, 2016 becoming effective. As a result, a registry is now being set up for registration of security interests created over movable assets of individuals, which will strongly benefit the banking sector; previously, a registry for such security interests was not available in Pakistan. To facilitate corporate restructuring and rehabilitation of struggling companies, the SECP has also introduced Corporate Restructuring Rules which provide institutional arrangements and legal processes for the revival and rehabilitation of potentially viable companies.
Additionally, several measures have been undertaken to develop and promote investment through the capital markets. Examples of such measures include the Futures Market Act which contains dedicated provisions for derivative markets and is designed to protect public interest through a system of effective self-regulation of futures markets/clearing systems, and amendments in the regulations governing public offering in Pakistan, so as to promote quality listing. Further, to make the capital markets more robust, various other legislative reforms were observed during the FY19 including amendments to the Public Offering Regulations as well as introduction of revamped Listed Companies (Code of Corporate Governance) Regulations.
A centralized e-portal (CES) for public listing has also been introduced and developed through the Central Depository Company Pakistan Limited, in collaboration with 1LINK Guarantee Limited. Through the CES, investors can submit an application electronically via the internet, ATMs and mobile phones for subscription of securities of companies offered to the public.
The judicial system, which consistently faces a shortage of arbiters, is encumbered by the number of new cases initiated annually (with virtually no costs being imposed on frivolous causes) as well as the existing pendency of cases. However, a number of steps had been initiated by the former Chief Justice and by the new Government to improve the efficiency of the justice system in Pakistan.
The original jurisdiction of the Supreme Court has been exercised liberally in matters of public importance during the last year or so (and it has touched upon and decided several matters of commercial significance as well).
The new legislative regime in Pakistan to give effect to the New York Convention and the International Convention on the Settlement of Investment Disputes between States and Nationals of other States has made it difficult for the courts to refuse to refer a matter to arbitration and has also curtailed the discretion available to the courts to refuse to give effect to a foreign arbitral award. The jurisprudence being developed by the superior courts also gives effect to the intention of the legislature.
The current Government’s privatization programme includes privatization of 17 Public Sector Enterprises (PSEs). Since the start of FY18, privatization of only a few different state-owned entities had been approved by the Privatization Commission and the Government including First Woman Bank Limited, Lakhra Coal Mines, SME Bank Limited and Mari Petroleum Limited. During FY19, approval of the Privatization Commission and the Government was received for privatization of another 10 PSEs including House Building Finance Corporation, Oil and Gas Development Company Limited and Pakistan Petroleum Limited. The privatization plan is expected to pick up speed with the new Government in Pakistan.
The current Government has recently enacted the novel Naya Pakistan Housing and Development Authority Act to promote the planning, development and management of real estate development schemes and projects with a view to boost the availability of low-cost housing. The current Government has also taken further steps to enhance the outreach of existing social development programmes including cash transfer schemes to those living below the poverty line.