Leadership and Democracy LabWestern Social Science

Infrastructure Quality, Foreign Investment & New Government

AfPak Infrastructure Quality, Foreign Investment, and New Government

January 27, 2015

Ashley Audette – Primary Article Contributor following AfPak

Nathan Sukhdeo - Team Leader following AfPak

Keywords: Quality, Foreign Investment, Infrastructure, Democratic Reform, Afghanistan, Pakistan

Pakistan’s growing infrastructure beckons foreign investors currently through a multitude of tax incentives, such as through exports and sectorial expansion. This current drive toward foreign direct investment is evident through its established regional five-year tax holiday available to investment in rural areas, as well as the exemption from income tax for agricultural income to stimulate the unexploited potential in various major Pakistani sectors. The large trainable workforce, coupled with increasing consumption domestically provides a wide range of compelling and inviting corporate opportunities within the region.

There is an obvious need for considerable capital investment given the demanding infrastructure requirements for such a growing populous, in addition to possessing an ideal regulatory environment for investors with no restrictions on foreign ownership, foreign exchange conversion, as well as financial repression,  and the hiring of expatriates. As mentioned previously, Pakistan offers low corporate tax rates as well as investor friendly tax incentives for strategic investments, and historically foreign investment returns in Pakistan have been favourable.

Large infrastructure related investments that have been credited to the current government would most notably be the construction of the China-Pakistan Economic Corridor, as well as the various major road, rail, and pipeline projects under CPEC. New governing bodies would focus largely on the growing need for investment in the energy sector of Pakistan, as 10 power projects included in the CPEC umbrella of investment are essential and urgent in meeting the country’s growing power needs. Several policy issues must be addressed as well to unlock Pakistan’s foreign investment potential, such as financing development programs, and ending the endemic corruption in the Pakistani bureaucracy.

While foreign investment within the region of Afghanistan is invited, it is difficult to foster. Foreign companies operating within the region share the same legal rights and investment opportunities, as domestically operating companies. As such, they share the unfortunate political violence, weak regulations, as well as under developed financial markets that come with the region. This includes insufficient infrastructure development which poses long term limitations to attracting foreign investment. Afghanistan also faces multitudes of corruption, at all levels of government, that poses a threat to foreign direct investment.

Despite these downfalls, Afghanistan has in recent years slowly crept toward redemption. Through railway projects like their current project aiming to connect with Tajikistan in 2013, as well as recent Chinese interest in potential developmental support of continuing railroad infrastructure as well as hydroelectric construction. Furthermore, Ashraf Ghani, the president of Afghanistan, has argued that despite the country’s instabilities the inclusion of citizens in economic projects could bring about stability, coinciding with US military expansion plans as well as continual funding to the Afghan police. Ghani also stresses regional ties as well as infrastructure investment as the key to prosperity and stability.