Energising the Tech Investment Ecosystem in Pakistan

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Executive Summary

Pakistan’s economy has been unable to raise living standards for a population that is growing at a higher pace than associated regional averages. Economic growth has been constrained by a range of issues, such as stagnated exports, fiscal and current account deficits, and high government borrowing leading to limited private sector credit uptake. Short of radical and irreversible reforms, these structural issues continue to block Pakistan’s pathway to transition to an upper-middle-income country.

With a median age of 23 years, Pakistan is witnessing a youth bulge and currently has the youngest population in the country’s history. This offers a timed window until 2045 to realise a demographic dividend created by a working age population that is currently almost 1.6 times as large as its dependent population. However, Pakistan fares poorly on most human capital indicators, which necessitates not only adequate social investment in areas such as healthcare and education but also a large and diverse enough economy that productively engages and absorbs this workforce.

Health and economic disruptions caused by Covid-19 have further created a new and unprecedented set of opportunities, defining a new normal in which technology and digital are essential to how we live and interact. This forced adoption highlights a fast-tracking of necessary improvements across a wide array of critical functions and services. Pakistan has experienced promising trends during Covid-19 that point towards an inflection point, which indicates that a runway for technology’s take-off may just be ready. Key highlights during the last year and a half include increased e-commerce and digital transactions, improved broadband penetration, growth in IT exports, and a bouquet of education, health, and financial services increasingly delivered through digital channels.

Social mobility and economic transformation have eluded Pakistan for most of its history. Elite capture has defined Pakistan’s economy, as reiterated repeatedly by voices from Pakistani economists, global development indicators, benchmarking exercises, and multilateral diagnostics. The technology sector offers a three-tiered opportunity, unparalleled and unprecedented in scale and scope, for economic transformation, writ large, and for social mobility:

• Technology startups offer the capacity to enable game changing shifts in the structure of elite voice and accountability. Creating a new class of technology entrepreneurs and ensuring their success will be of cardinal importance for policy and politics.
• Applications that leverage technology for increased inclusion of citizens and improved services for citizens will foundationally alter both expectations and performance in the citizen-state relationship.
• Technology has the potential to fundamentally alter how government works in Pakistan and can help fundamentally alter the cost, effectiveness, transparency, and efficiency of government.

Factors such as Pakistan’s young and digital native demographic, fundamental gaps in reach and adoption of government services, digital data, records and enterprise automation, and a fast-growing connectivity landscape position the technology ecosystem to be ripe for investment. This is evident by the record funding in tech startups that has grown manifold in sectors like fintech, e-commerce, edtech, and healthtech.

Due to the vast number of players in the technology universe, this paper defines technology in broad terms to comprise of direct and indirect contributors to the provision and enablement of technology and technology-adjacent business and consumer services. Key categories included are infrastructure and connectivity providers as enablers, device manufacturers, software houses and technology services firms, platforms, and service providers.

Pakistan’s technology policy landscape is influenced by a range of policy, regulatory and administrative instruments. These broadly fall into two categories:

1. Investment regime: policies and regulations that define and govern overarching climate and enabling environment for investors in the tech sector in Pakistan
2. Technology regime: policies and regulations that define and govern sector specific issues and affect how the technology space will evolve

The combination of these regimes determines how Pakistan’s tech sector is perceived from a growth point of view and thus has a direct impact on investments. While significant progress has been made in recent years to focus on policy evolution and government efforts, more will be required to keep up with the global market. Therefore, this policy suite will require a renewed and transformative approach to achieve its intended outcomes. Short-term fiscal and siloed jurisdictional lenses are limiting the adoption of a long-term strategic view of the sector. Participatory processes need to be extended and enriched by a deeper understanding of industry dynamics, issues and realities in order to design policies that deliver impact. While some progress has been achieved under a splintered governance regime, it has created a significant degree of confusion, friction and lost opportunities among investors.

There are three overarching pressure points that compel Pakistani policymakers to initiate reforms and changes that will energize the tech investment ecosystem in Pakistan.

1. Fiscal and monetary pressure on the economy that can only be addressed through increased exports and higher FDI, both of which will be increasingly informed by the technology ecosystem.
2. Widely acknowledged administrative complexity, from complex rules of business to the threat of unfair and unfounded allegations of corruption, prevents risk taking and swift decision making by government officials, a problem that is oft- acknowledged but rarely tackled.
3. Pakistan’s young demographic requires a tech-friendly economy in order to receive a kind of growth that the country currently does not offer.

Energising the tech investment ecosystem will require a series of immediate interventions which can improve the direction of, and renew focus on, more longer-term and strategic course-setting.

Immediate interventions should focus on:

• Fixing the investment climate by protecting the rights of existing investors, strengthening of the STZA model, and investing in human capital is required to fast-track technology adoption.
• Improve access and connectivity by aligning allocation and deployment of radio- frequency spectrum with market and industry dynamics, curbing predatory pricing behaviour, and focusing on rigorous quality standards to enhance user experience.
• Establishing technology as a value and norm through the initiation of a comprehensive campaign for “Tech Destination Pakistan”, high engagement of diplomatic channels and diaspora, and proactive showcasing of incentives, flagship deals, and case studies.

Long-term strategic shifts should:

• Craft a renewed vision to align the system through the establishment of an umbrella framework for technology investment policy, development of a roadmap for technology investment in Pakistan and universal consensus on shared priorities at all layers to align competing incentives across public sector agencies.
• Develop the market by investing and attracting international institutions to improve the skills base, promote localisation to boost the capacity of domestic technology firms, accelerate digitisation in the government and focus on improving intellectual property rights protection.
• Overhaul governance and capacity by revamping the institutional architecture and creating convergence in the technology mandate, behaviour change exercises in the public sector to embrace the technology world and deepen the performance agreements framework instituted by the Establishment Division.