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The Pakistan legal system is derived from English common law and is based on the much-amended 1973 constitution and Islamic law. The former is more influential in commercial law....

The Pakistan legal system is derived from English common law and is based on the much-amended 1973 constitution and Islamic law. The former is more influential in commercial law. The Federal Shariah Court, which presides over Islamic law, may overturn any legislation deemed to be inconsistent with the doctrine of Islam.

The country's Rule of Law suffered from decades of military rule with only intermittent periods of democratic governance. Since much of the law derives from the British colonial system, it is seen in some circles as lacking legitimacy as well as creating tension with Islamic law. The court system is also seen by some as inefficient and corrupt and while improvements are being made, the progress has been slow and has been hampered by calls for more strict versions of Islamic law.

Pakistan's legal market consists almost entirely of domestic law firms, which, while not heavily specialised, provide advice across the financial and corporate spectrum with many of the lawyers' overseas educated.

In the last year there have been some notable developments on the legal front, one of which was an amendment to Regulation 4-A of the Competition (Merger Control) Regulation which provides that certain transactions be exempt from filing pre-merger notifications. Under the revised Regulation 4-A, a transaction in which a holding company, whether incorporated in Pakistan or outside of Pakistan, increases its stake in its subsidiary(s), Pakistan incorporated or not, is exempt from filing. The same applies if such subsidiary acquires or increases their equity investments in each other. Bank proprietary trading transactions are also exempt from filing.

Another development has seen Pakistan grant India 'Most Favoured Nation' (MFN) status. This will result in equal treatment in regards to tariffs on Indian imports as to other trading partners. Both governments hope that bilateral trade between the two countries will double to approximately $4 billion by 2014. Developing closer relations with India will not be the ultimate solution to Pakistan's problems either, but would be a first step in opening up trade relations and access to the Indian market whose population is over one billion.

CONTEXT AND TRENDS Pakistan has the potential to become an economic success in central Asia following in the footstep of its neighbour, India. However, 2011 proved to be a turbulent year for the country....

Pakistan has the potential to become an economic success in central Asia following in the footstep of its neighbour, India. However, 2011 proved to be a turbulent year for the country. Political uncertainly, power shortages, terrorism, escalating inflation and flood devastation have all taken their toll. Furthermore, a combination of UN and US sanctions and tense diplomatic ties with the latter in the aftermath of Osama Bin Laden's death is creating an unsettled political landscape.

For investors, their attention has been drawn to the increasing bloody violence that has engulfed several of the country's largest cities, some of which at times have been shut down affecting everything from factories and shopping malls to government offices. Workers are opting to stay at home rather than risk danger, which is eroding profits. This is affecting both local and foreign businesses that rely on local labour and transportation. In order to restore investor confidence the government in collaboration with the courts will need to be seen to be addressing these problems.

Aside from the above, a drop in foreign direct investment, power shortages, poor infrastructure and institutional deficiency remain significant challenges to the economy. The major problem now is how to get the population to pay either tax or energy bills. In December 2011 a Beyondbrics article on the Financial Times website estimated that less than 1% of Pakistanis pay income tax and the cause has been attributed to a poor legal framework, corruption and tax avoidance. This is of some concern as the budget deficit is well above the target and failure to plug this shortfall by expanding fiscal policies has led to a premature ending of a three-year IMF loan package.

With power shortages a major problem for the whole of Pakistan, the Central Power Purchasing Agency (CPPA) has the mammoth task of tackling this problem. The country's main export, textiles, has been crippled because of this issue and is in danger of falling further behind India as a result. The problem is predominantly due to the government's inability to pay for electricity produced by privately owned power companies. To make matters worse, hydroelectric power generation projects, seen as a cheaper alternative to thermal and gas powered plants, have been, in the views of some, mismanaged in their construction, causing damage to surrounding land and settlements. To help alleviate the problem a number of Independent Power Producer (IPP) projects have been approved with a total capacity of 15738 MW by 2019. This is a significant increase on the current capacity of 6870 MW from the 27 private power projects currently in operation. As a result, law firms have been particularly active assisting clients in all matters ranging from power regulation, agreements, licensing, tariffs and financing.

On a more positive note, there are sectors primed and waiting for investment. The country may not be known its oil and gas reserves, but on numbers alone they make remarkable reading. Crude oil reserves are estimated at over 300 million barrels and current oil production is 65,000 barrels a day, while gas production is at 4 billion cubic feet per day. Petroleum exploration is highly structured and regulated with the Ministry of Petroleum and Natural Resources responsible for regulating all upstream exploration and production activities.

However, on current consumption Pakistan will not be able to maintain gas self-sufficiency much longer due to rising domestic consumption and as more power projects come online. It is likely that the government will attempt to privatise more of its state-owned energy companies and stimulate investment in oil and gas production. Alternatively, it could engage in more agreements like the one with Eni of Italy whereby access has been granted to state-owned oil and gas fields for development and production in return for their expertise and technology.

Recent development has been the drafting of several cross-border pipeline construction projects including the Iran-Pakistan (IP) gas pipeline, and Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline projects. Bidding for construction will begin later this year with the first flow of gas expected in December 2014 and 2016, respectively.

MAJOR LEGISLATION CHANGES

Amendment to Competition (Merger Control) Regulation
Entered into force October 2011