Protection of Foreign Direct Investment in Pakistan: Is It Time to Address the Deterring Factors?
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PROTECTION OF FOREIGN DIRECT INVESTMENT IN PAKISTAN: IS IT TIME TO ADDRESS THE DETERRING FACTORS? Mohammad Raheem Awan This is a digitised version of a dissertation submitted to the University of Bedfordshire. It is available to view only. This item is subject to copyright. PROTECTION OF FOREIGN DIRECT INVESTMENT IN PAKISTAN: IS IT TIME TO ADDRESS THE DETERRING FACTORS? by Mohammad Raheem Awan In partial fulfilment of the requirements for the Degree of Doctor of Philosophy University of Bedfordshire 5th December 2015 Abstract Foreign direct investment (“FDI”) is one of the significant sources of social and economic change in developing countries. It can be used in terms of transferring capital, technology and administrative skills to the host country. The Board of Investment of Pakistan (“BOI”) emphasizes that due to Pakistan’s cheap manpower and low production cost coupled with many other reasons, it is a perfect market and location for FDI. This study has examined several aspects of FDI in Pakistan’s context, such as the role it has played in the growth of Pakistan’s economy and may well play in the future. The factors which play motivational and decisive role in foreign investors’ decisions to invest or withdraw their capital such as economic attractions, deterring factors and legal protections afforded to FDI in Pakistan. Existence of deterring factors requires the host State to adopt special measures and offer added protection to foreign investors such as protection through bilateral investment treaties (“BITs”), investment agreements and domestic laws. Therefore, the main concern of this study is the legal protection afforded to FDI in Pakistan. The study has investigated three fundamental factors, directly related to protection of FDI in Pakistan their role and aftermaths; the BITs, the role of higher judiciary and legal protection under domestic statutes. To investigate the first factor, a number of BITs executed by Pakistan have been selected and examined in the light of old and new treaty arbitration cases against Pakistan. It has been revealed that successive Pakistani governments have used BITs as political publicity vehicle and executed this instrument in a haphazard manner, without meaningful negotiations and without understanding the full legal implications. An absolute lack of competency, skills and know-how to negotiate and draft BITs on the part of the Government of Pakistan (“GOP”) has been revealed. The investigation on the role of judiciary, has found a powerful judiciary the Supreme Court of Pakistan (“SCP”) which has emerged as an assertive organ of the State. In last about one decade the SCP has expended the scope of public interest litigation (“PIL”) for enforcement of fundamental rights under unique ‘suo moto’ jurisdiction and endlessly interfered directly in commercial and FDI matters. The current study differentiates judicial activism and judicial interference and argues that, there is a very thin line between these two, and that encroaching on the sphere of other State organs may possibly convert judicial activism into judicial interference. The study has also ii examined several domestic statutes related to FDI and has found weak legal protection afforded to FDI under domestic laws of Pakistan. It has revealed that all three factors have exposed Pakistan to costly international arbitration initiated by foreign investors, shattered their confidence which in turn affected inward flow of FDI. To enable GOP to attract the required FDI in the desired sectors this thesis recommends reforms to address these deterring factors and also adopting a pragmatic balanced approach insuring respect of sovereignty of Pakistan and protection of assets of foreign investors. iii Acknowledgements I would like to acknowledge my current supervisory team Dr. Chrispas Nimobi, Professor Ram Ramnathan, Tom Mortimor, and my previous supervisory team Dr Hakeem Seriki and Dr Silvia Borelli. You have provided much support and challenged me over these years of study. I would like to acknowledge the University of Bedfordshire’s former VC Les Ebdon and DVC Ashraf Jawaid for their support, help and guidance. There are many people among my family whom I would like to thank for their patience and sacrifices in my absence: my mother Gulshera Awan, my elder brother Muhammad Aslam Awan and my other family members, my wife, daughter Romysa Raheem, brothers, sisters, nephews and nieces. I would also like to extend my thanks to my friends for their support on this journey, especially former Prime Minister of Pakistan H.E. Shaukat Aziz. Also, I would like to thank Dr Peter Norrington for support with proofreading the thesis. iv Table of Contents Contents Abstract ii Acknowledgements iv Table of Contents v List of Abbreviations x Declaration xiv CHAPTER 1: INTRODUCTION 1 1.1 Background and Significance of the Study .............................................................................. 1 1.2 Scope of the Study .................................................................................................................. 5 1.3.1 Aim and Objectives .............................................................................................................. 6 1.3.2 Research Questions .............................................................................................................. 7 1.3.3 Structure of Thesis and Key Findings/Arguments ................................................................ 7 1.4 Literature Review .................................................................................................................. 15 1.4.1 Literature providing theoretical discussion on benefits of FDI .......................................... 15 1.4.2 Literature providing theoretical discussion on attraction of FDI ....................................... 18 1.4.3 Literature providing discussion on the State’s responsibility to protect private property 19 1.4.4 Literature on Bilateral Investment Treaties ....................................................................... 25 1.4.5 Literature on influential factors and risks to FDI ............................................................... 28 1.4.6 Literature on FDI and influential factors in Pakistan.......................................................... 29 1.4.7 Literature on Judicial Activism ........................................................................................... 31 1.5 Gap in the Literature and Contribution ................................................................................ 32 1.6 Research Methodology ......................................................................................................... 33 1.6.2 Statement of ethical consideration .................................................................................... 38 CHAPTER 2: STATE RESPONSIBILITY TO PROTECT PRIVATE PROPERTY 39 2.1 Introduction .......................................................................................................................... 39 2.2 State Responsibility to Protect Private Property .................................................................. 39 2.3 Doctrine of Absolute Immunity of the State ......................................................................... 41 2.4 Doctrine of Restricted Immunity of the State ....................................................................... 43 2.5 The Calvo Doctrine and Current Development ..................................................................... 46 v 2.6 Hull Formula .......................................................................................................................... 48 2.7 Washington Convention / ICSID Convention ........................................................................ 51 2.8 Emergence of Bilateral Investment Treaty Regime .............................................................. 55 2.10 Conclusion ........................................................................................................................... 55 CHAPTER 3: FDI IN PAKISTAN: A THEORETICAL DISCUSSION ON BENEFITS FOR PAKISTAN, REASONS TO INVEST AND DETERRENTS 58 3.1 Introduction .......................................................................................................................... 58 3.2 Benefits of FDI for the Host Economy ................................................................................... 58 3.2.1 Theoretical discussion on benefits of FDI .......................................................................... 58 3.2.2 Role of FDI in the development of Pakistan ....................................................................... 62 3.3 Factors which Attract FDI ...................................................................................................... 65 3.3.1 Theoretical discussion on attraction of FDI ....................................................................... 65 3.3.2 Application of FDI attraction theories to the Pakistani context ........................................ 68 3.4 Deterrents to FDI ................................................................................................................... 73 3.4.1 Influential factors and risks to FDI ..................................................................................... 73 3.4.2 Potential threats to FDI in Pakistan.................................................................................... 75 3.4.2.1 Political Instability and Inconsistency in the Governmental Policies .............................