Three Don’ts of Investment in Pakistan

Amongst many other economic myths, investments are a particularly confounding one in Pakistan. Not so for the common entrepreneur in the street, most of who lurk in the shadows of the informal economy and keep their cards safely tucked away up their sleeves. The official face of investments is of course another matter, as they appear in neat computer print-outs for the officialdom to flaunt (or defend) at press conferences. There are two sides to the myth in the minds of the officials: One, that investments automatically bring growth and prosperity. Two, that somehow they can will investments without providing an environment for it on the ground. It is almost like the rooster thinking he can bring the Sun up if he crows. If by chance he crows at the right time and the Sun does rise out of the horizon it reinvigorates his myth.

All investments are risks, even if made by the public sector under monopolistic conditions; Wapda for instance or the Railways. Only a few years ago, the Asian tigers had their fingers burned when their economies melted down with the heat of imprudent foreign investments. Mahathir hasn’t forgotten it, as he lamented at the UN only yesterday, blaming the western investors and money dealers. Our stock exchange at Karachi has been baptised more than once and Mian Nawaz Sharif’s yellow cabs didn’t make South Korea out of Pakistan either! The myth still persists: If investors walk in the economy will take off. While investments are the blood line of an economy, they are liabilities too. It is not the quantum but the quality of the investor that matters at the end of the day. Privatisation Commission should pay heed to this too! After all, there are over three thousand sick industries (different from non-performing loans) in Pakistan where the healthy ones are working under capacity.

More than that, investors are like virus. Give them a conducive environment and they proliferate; otherwise no amount of enticement and solicitations will attract them. Our official attitude holds that policies made on paper should excite them infinitely and they should come running. If they don’t then something is wrong with them not the policy. There is no one to tell them, Brother, it is not the policy but the realities on the ground that turns the investors on. Why should they storm sultry Dubai and not come to the lure of the fatal charms of Lahore?

The migratory geese that they are, the investors are beginning to return to Pakistan now after many years. In spite of fundamental flaws, last four years of policy and management discipline has created a hope of revival in the economy. Investors are creeping out of the woodwork like moths after rain and making inquiries. Business consultants are removing cobwebs from their doors to service the new breed of clients. I am not speaking of APTMA elite who have poured in about 66 billion Rupees in the last four years for BMR and expansion into value addition (mostly because of the prudent policy guidelines made by SMEDA in Textile Vision 2005 for which it was never given any credit), or the expatriates sending back hard earned dollars into Real Estate and stock markets. I am speaking of the small and medium entrepreneur who feels that given low inflation, low interest rates and a general sense of economic health of the country it may be worth exploring avenues for investment. Gone are the days of mega-buck investor in the large scale new industrial ventures like oil, gas, cement, chemicals, polyester etc. feeding on tariff protection. Time for the SMEs is ripe. Banks are looking at four new avenues for credit markets: Agriculture, SMEs, Housing finance and Consumer banking services, all little guys.

In this perspective, I am getting many inquiries from potential investors, both existing businessmen and new entrepreneurs, about where to invest. Before getting into many complexities of risk assessment, I give them a golden rule of three Don’ts. I don’t see why the readers should not share this simple rule of thumb.

First, don’t go into anything which has, in anyway, any dependency on a government agency or a policy incentive. To underscore the warning I tell them, if your business premises have a shadow of a government building falling over it move your premises. Fill your ears with wax like Ulysses did on Circe’s command to save them from the song of the Sirens, the sea nymphs who had the power of charming by their song all who heard them, so that unhappy mariners were irresistibly impelled to cast themselves into the sea to their destruction. I have known far too many who listened to the Sirens of government incentives and cast themselves to destruction. I can tell you harrowing tales of investors who won bids from public sector agencies on projects initiated by the President himself, only to find their contracts unilaterally terminated because of the whims of individual officials after they had mobilised millions of Rupees. A bulk grain storage company, joint venture with a Canadian company, is a recent example. The chairman of a public commodity storage agency has reneged on a contract which was made through open tenders and due scrutiny because he is not convinced of the universal practice of bulk storage of wheat. He wants to continue the archaic practice of using jute bags. He doesn’t want to be de-bagged (forgive the pun), so to say. The lure of Corporate Farming is another case in point. Thank heavens; no one has been burned yet in that area!

Second rule: don’t go high tech, what ever else you do. High tech is a non-starter in Pakistan. It requires highly trained personnel. Initially you won’t find them; and if you train them, they will fly away to greener pastures. Ask any software exporting company and they will give you wisdom, free of cost. Utilities and infrastructure are immature. Don’t depend on them; creating your own will knock your costs out of the global markets. I have a high tech cable modem connection for the net. I am perpetually worried about any pie dog answering the call of nature by the pylon because it short circuits and I have no connection for hours. High tech and Pakistanis just don’t go together. Wapda and cellular phone companies are only reliable as long as you don’t need them in urgency.

Third, rule: don’t venture into anything down the beaten track where existing entrepreneurs have marked out a domain since long. Spinning, ginning, ghee mills, soap factories, flour mills and such ubiquitous industries are out of bounds for new entrants. The maze of impossible rules and regulations are not easy to charter. Existing operators have mastered the art of circumventing laws and have all the rent seeking facilitators in their pockets. A new entrant would be a spare prick at a wedding. There are easier ways to loose your shirt.

A flour mill owner was revealing tricks of the trade to a new investor some time ago. He was telling that they are six brothers in the business. One looks after wheat purchases from market and food department, one runs after credit recoveries from retailers in the city, one is dedicated to Wapda and utilities, one is full time busy with tax matters, one runs the flour mill and one goes to jail whenever there is a raid on the mill. “How many brothers are you?” he asked. The potential investor was wise; he changed the subject and starting talking about cricket, where the team work required is even greater.

So there it is, simple: No government, no high tech and no conventional path. Pakistan is a virgin territory for new business avenues. Of course, the investor will have to be innovative, work hard, be honest and be patient for the fruits to bear. It can be made to happen, even in Pakistan, although conventional business sense may consider this rather foolish and self-defeating.

Iqbal Mustafa
26 September 2003

1330 words