Transparency of the Regulatory System
Pakistan generally lacks effective policies and laws that foster market-based competition in a non-discriminatory manner. The Competition Commission of Pakistan (CCP) has a mandate to ensure market-based competition, but laws and regulations are opaque, vary among provinces, and are sometimes applied to benefit domestic businesses. The CCP has remained without a three-member quorum of commissioners since March 2022 and is currently unable to take decisions. All businesses in Pakistan are required to adhere to certain regulatory processes managed by the chambers of commerce and industry. Rules, for example on the requirement for importers or exporters to register with a chamber, are equally applicable to domestic and foreign firms.
The federal government establishes and implements legal rules and regulations, but sub-national governments have a role as well depending on the sector. Prior to implementation, stakeholders can provide feedback to the government on regulations and policies. Regulatory authorities are required to conduct post-implementation reviews of regulations in consultation with relevant stakeholders. However, these assessments are not made publicly available. Since the introduction of the 18th amendment to Pakistan’s constitution in 2010, which delegated significant authorities to provincial governments, foreign companies must comply with provincial, and sometimes local, laws in addition to federal law. Foreign businesses complain about the inconsistencies in the application of laws and policies from different regulatory authorities. There are no rules or regulations in place that discriminate specifically against U.S. firms or investors, however.
The SECP is the main regulatory body for foreign companies operating in Pakistan, but it is not the sole regulator. Company financial transactions are regulated by SBP, labor by Social Welfare or the Employee Old-Age Benefits Institution (EOBI), and specialized functions in the energy sector are administered by bodies such as the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, and Alternate Energy Development Board (AEDB). Each body must submit draft regulatory or policy changes through the Ministry of Law and Justice before any proposed rules or regulations may be submitted to parliament or, in some cases, the executive branch. The SECP is authorized to establish accounting standards for companies in Pakistan. Pakistan has adopted most, though not all, International Financial Reporting Standards. Though most of Pakistan’s legal, regulatory, and accounting systems are transparent and consistent with international norms, execution and implementation is inefficient and opaque.
The Pakistani government requires companies to provide environmental, social, and governance (ESG) disclosures on their projects in country, but there is no single regulatory mechanism or central regulation for such requirements. For instance, companies must work with the Ministry of Climate Change on environmental disclosures; the EOBI on social disclosures, such as those that concern pensions; and SECP on governance disclosures. However, implementation and monitoring and enforcement mechanisms for such requirements are weak and opaque.
Most draft legislation is made available for public comment but there is no centralized body to collect public responses, nor is there a standard comment period requirement. The relevant authorities, usually the responsible ministry for proposed legislation, gathers public comments as it deems necessary; otherwise, the government submits legislation directly to the parliament. For business and investment laws and regulations, the Ministry of Commerce relies on stakeholder feedback obtained from chambers and associations rather than publishing regulations online for public review. Stakeholders may also have an opportunity for comment with members of Parliament and in parliamentary committees once the government has sent proposed draft legislation to the Parliament for review
There is no centralized online location where key regulatory actions are published. Different regulators publish their regulations and implementing actions on their respective websites. In most cases, regulatory implementing actions are not published online. Businesses impacted by non-compliance with government regulations may seek relief from the judiciary, ombudsman’s offices, and the Parliamentary Public Account Committee. These forums are designed to ensure the government follows required administrative processes. Pakistan did not announce any enforcement reforms during the last year. The BOI introduced the Pakistan Regulatory Modernization Initiative (PRMI) in June 2021 with the objective to make it easier for local and foreign businesses to comply with Pakistan’s regulations. The initiative, still in its early stages, aims to map all rules, procedures, laws and regulations; and streamline and digitize them.
International Regulatory Considerations
Pakistan is a member of SAARC, the Central Asia Regional Economic Cooperation (CAREC), and Economic Cooperation Organization (ECO). Pakistan has been a World Trade Organization (WTO) member since January 1, 1995, and provides most favored nation (MFN) treatment to all member states except India and Israel. In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement (TFA). Pakistan is one of 23 WTO countries negotiating the Trade in Services Agreement. Pakistan notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade, albeit at times with significant delays.
Pakistan’s judicial system incorporates British standards. As such, most of Pakistan’s regulatory systems use British norms to meet international standards.
Legal System and Judicial Independence
Most international norms and standards incorporated in Pakistan’s regulatory system, including commercial matters, are influenced by UK law. Laws governing domestic or personal matters are strongly influenced by Islamic Sharia law. Regulations and enforcement actions may be appealed through the court system. The Supreme Court is Pakistan’s highest court and has jurisdiction over the provincial courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government. Decisions by the courts of the superior judiciary (the Supreme Court, the Federal Sharia Court, and five High Courts – Lahore High Court, Sindh High Court, Balochistan High Court, Islamabad High Court, and Peshawar High Court) have national standing. The lower courts are composed of civil and criminal district courts, as well as various specialized courts, including courts devoted to banking, intellectual property, customs and excise, tax law, environmental law, consumer protection, insurance, and cases of corruption.
Pakistan’s Contract Act of 1872 is the main law that regulates contracts with Pakistan. British legal decisions, under some circumstances, are also cited in court rulings. While Pakistan’s legal code and economic policy do not discriminate against foreign investments, enforcement of contracts remains problematic due to a weak and inefficient judiciary.
Theoretically, Pakistan’s judicial system operates independently of the executive branch. Although higher courts are widely viewed as credible, lower courts are often considered corrupt, inefficient, and subject to pressure from outside influences including the executive branch, the military, and other prominent figures. As a result, there are doubts concerning the competence, fairness, and reliability of Pakistan’s judicial system. In addition, concern over potential contempt of court proceedings inhibits businesses and the public from reporting on perceived weaknesses of the judicial system. Regulations and enforcement actions are appealable. Specialized tribunals and departmental adjudication authorities are the primary forum for such appeals. Decisions made by a tribunal or adjudication authority may be appealed to a high court and then to the Supreme Court.
Laws and Regulations on Foreign Direct Investment
Pakistan’s investment and corporate laws permit wholly owned subsidiaries with 100 percent foreign equity in most sectors of the economy. In the education, health, and infrastructure sectors, 100 percent foreign ownership is allowed. In the agricultural sector, the threshold is 60 percent, with an exception for corporate agriculture farming, where 100 percent ownership is allowed. There is no “single window” website for investment in Pakistan which provides direct access to all relevant laws, rules, and reporting requirements for investors.
Most foreign companies operating in Pakistan are “private limited companies,” which are incorporated with a minimum of two shareholders and two directors registered with the SECP. While there are no regulatory requirements on the residency status of company directors, the chief executive must reside in Pakistan to conduct day-to-day operations. Corporations operating in Pakistan are statutorily required to retain full-time audit services and legal representation. Corporations must also register any changes to the name, address, directors, shareholders, CEO, auditors/lawyers, and other pertinent details to the SECP within 15 days of the change. To address long process delays, in 2013, the SECP introduced the issuance of a provisional “Certificate of Incorporation” prior to the final issuance of a “No Objection Certificate” (NOC).
Competition and Antitrust Laws
Established in 2007, the CCP is designed to ensure private and public sector organizations are not involved in any anti-competitive or monopolistic practices. Complaints regarding anti-competitive practices can be lodged with CCP, which conducts the investigation and is legally empowered to impose penalties. The CCP appellate tribunal is required to issue decisions on any anti-competitive practice within six months from the date in which it becomes aware of the practice. The CCP is without a three-member quorum of commissioners since March 2022 and is unable to take decisions. The government has advertised positions to fill vacancies. The CCP concluded actions against 134 businesses during the past two years in sectors including cement, agriculture, and energy. In March 2022, the CCP passed an order against two home appliance manufacturers for price-fixing. In December 2022, the CCP passed an order penalizing a paint company for deceptive marketing practices. The company had falsely claimed its product provided protection against COVID-19. The CCP generally adheres to transparent norms and procedures. Agency decisions are reviewable by the CCP appellate tribunal and the Supreme Court of Pakistan.
Expropriation and Compensation
The Protection of Economic Reforms Act 1992 and the Foreign Private Investment Promotion and Protection Act 1976, protect foreign investment in Pakistan from expropriation, while the 2013 Investment Policy reinforced the government’s commitment to protect foreign investor interests. Pakistan has had few instances of alleged expropriation.
ICSID Convention and New York Convention
Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). Pakistan ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 2011 under its “Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act.”
Investor-State Dispute Settlement
Pakistan has Bilateral Investment Treaties (BIT) with 32 countries. The BITs include binding international arbitration of investment disputes. Since foreign investors generally distrust Pakistan’s domestic courts to enforce commercial contracts, they often include clauses requiring binding international arbitration of investment disputes in contracts with the Pakistani government. Pakistan does not have a BIT or FTA in force with the United States. Local courts do not recognize and enforce foreign arbitral awards issued against the government. Any award involving a domestic enforcement component needs an additional affirmative ruling from a local court. There is no history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Arbitration and special judicial tribunals do exist as alternative dispute resolution (ADR) mechanisms for settling disputes between two private parties. Pakistan’s Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, but cases typically take years to resolve and most foreign investors include contract provisions that provide for international arbitration. Pakistan’s judicial system also allows for specialized tribunals as a means of ADR. Special tribunals are able to address taxation, banking, labor, and IPR enforcement disputes. However, foreign investors lament the lack of clear, transparent, and timely investment dispute mechanisms. Pakistani courts have not upheld some international arbitration awards. Any such award, involving local enforcement, requires direction from a local court. The Reko Diq mining dispute is an example where an international arbitral award against Pakistan was not enforced by local Pakistani courts and remained unresolved for 15 years until December 2022. Generally, domestic courts favor SOEs for their investment disputes against foreign entities on the basis of “public interest.” However, there has not been a relevant case in the past ten years.
Pakistan does not have a single, comprehensive bankruptcy law. Foreclosures are governed under the Companies Act 2017 and administered by the SECP, while the Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions. Court-appointed liquidators auction bankrupt companies’ property and organize the actual bankruptcy process, which can take years to complete.