Banks and telecommunication attracting the largest chunk
SHABBIR H. KAZMI, Special Correspondent
Oct 02 - Oct 08, 2006
It had been debated for the long time whether foreign direct investment (FDI) is good or bad for the development of a country, particularly for the developing countries. Critics say that FDI, essentially, is a tool in the economic arsenal of the developed countries in their overall strategy to control the resources and markets of the developing countries. This control is necessary in order for Western corporations to counter against the downward pressure that is continually exerted by workers on corporate profitability. Contrary to the claims, FDI is not a means to assist the developing countries. However, FDI is well marketed by the West through development literature and through institutions such as the IMF, the World Bank, the WTO, and even the UNCTAD. On the other hand, a more qualified proposition is that properly regulated FDI can bring growth, jobs, technology, skills, market access and development. However its negative effects must be balanced with its good effects. FDI is neither good nor bad. It all depends on how a country deals with it.
The Pakistan government is working hard to attract large scale FDI into the country, including allowing foreign investors to hold unlimited equity and making concerted efforts to project a positive country image. To attract more FDI in Pakistan, Government of Pakistan opened many avenues for foreign direct investment and offered number of incentives to foreigners to invest in Pakistan. Most important measure in this regard was that the Government allowed 100% repatriation of profits by foreign investors which is rare in neighboring countries.
Prime Minister and President of Pakistan visited many countries and had exclusive meetings with the businessmen of those countries to convince them to invest in Pakistan. It was also appraised to the world that Economy of Pakistan is growing at faster pace which is guarantee for the better return of their investment. To show the strength of the economy of Pakistan, Government of Pakistan issued Euro bond and then Sakuk (Islamic bond) during the last year in international market. Both of these bonds were oversubscribed which shows the confidence of community of international investors in Pakistan's economy.
Pakistan's privatization program, particularly the one being undertaken by President Pervez Musharraf's regime, deserves better understanding and greater appreciation. Sale of state owned enterprises has helped in attracting huge foreign direct investment (FDI). Some critics term PSM episode a black spot. They also refer to other transactions where the highest bidders backed out. However, the reality is that second highest bidders were convinced to raise their bid and ultimately management control of these entities was transferred to new stakeholders. It is also on record that the earnest money of the defaulters was confiscated and management control was transferred to credible and financially sound parties.
Two sectors - banking and telecommunication - have contributed the largest chunk to the privatization proceed. Pakistan Telecommunication Company (PTCL) sell-off alone attracted over one billion dollars. Similarly privatization of United Bank and Habib Bank also contributed an equal amount, may be a little less. It will not be wrong to say that privatization of these entities has not only attracted huge foreign exchange but transfer of management control to credible and financially strong strategic investors has lured fresh investment and ensured technology transfer. Upgrading of the facilities will on one hand will improve the quality of goods and services and on the other hand bring down the cost being charged by the privatized entities.
More than 15 years ago the government opted three-pronged strategy of liberalization, deregulation and privatization. However, out of these privatization is most talked about strategy, for which the government is also criticized severely. Some of the critics term it 'selling family at through away price' Others call it 'emergence of another 'East India Company'. However, it must also be kept in mind that without liberalization and deregulation, privatization would have not been possible. In fact liberalization and deregulation was the preamble of privatization and creation of autonomous regulatory authorities has provided further impetus.
The present number of commercial banks operating in the private sector and its growing control on the banking assets is the outcome of the policy which started with the privatization of Muslim Commercial Bank followed by Allied Bank of Pakistan (ABL) sell-off. ABL transaction was unique because Employees Group emerged as the successful bidder and also got management control. However, later on the bank ran into financial problems and the central bank has to take its control, which was later on transferred to a Faisalabad-based textile group. Under the new management the bank has managed to clean its slate and emerging stronger with each passing day.
One of the recent acquisitions in Pakistan's banking sector needs specific mention. Lately many foreign banks had closed down their Pakistan operations. Standard Chartered Bank Pakistan has entered into agreements to acquire an 80.86% interest in Union Bank for a cash consideration of US$ 413 million. The Acquisition was unconditional but could not be complete without formal approval of the SECP. The acquisition of Union Bank will make Standard Chartered the sixth largest bank in Pakistan by market share of assets and will further extend Standard Chartered's business in a high growth market.
Standard Chartered currently has a network of 46 branches in 10 cities. Union Bank is the eighth largest bank in Pakistan by market share. It serves approximately 400,000 retail customers through its extensive network of 65 branches in 22 of Pakistan's major cities, and operates a small but growing Wholesale Banking business. It was established in 1991, and has demonstrated an impressive period of growth since the new Management Team took over the bank in 1999. This is evident particularly in the retail and Small and Medium Enterprise banking market, where it now holds strong market shares in mortgages, credit cards, personal and auto loans. Union Bank benefits from a strong independent local management team with a wealth of experience from leading international banks.
Another emerging transaction is that Britain's Baklays Bank is acquiring another Pakistani commercial bank. Reportedly this bank enjoys majority shareholding of sponsors of Arab origin. This would be another important transaction as couple of foreign banks are actively exploring Pakistan market for acquire commercial banks. There are two opinions, one that profit of commercial banks in Pakistan may go down in the near future. Therefore, it is an ideal opportunity for the Pakistani sponsors to sell-off their stake. The other point of view is that since the central bank has announced the enhanced paid-up capital requirement sponsors of some of the banks are not comfortable and consider it an opportunity to make money.
However, some analysts believe that foreign banks have realized that those taking exit from Pakistan had committed a mistake. They were unable to read Pakistan's turnaround story and made a hasty decision. However, with the passage of time it has become evident that Pakistan's banking sector offers very attractive returns. And if some local sponsors are selling their stake it is a golden opportunity not to be missed.
The present government has managed to turn around the economy and make it based more along the lines of tech-oriented industries rather than conventional industries of yore. One of the core changes has been the shift of the government itself from telecommunication service provider to market regulator. This vital sector has been given due consideration and as a result scores of new private entrants are gearing up to provide service, making Pakistan one of fastest-growing cellular markets.
Telecom sector of Pakistan is one of the sectors, which has been opened for foreign investment by the Government. This sector remained the talk of town in the last year when new international renowned players entered in the telecom market of Pakistan. Particularly, in the cellular sector of Pakistan two new operators of world fame were added with the existing four cellular players who are already working in Pakistan for the last 15 years. Two additional technology neutral cellular mobile phone licenses were issued to Telenor and Warid under the cellular mobile policy. These licenses were issued through open auction for US$ 291 million each. In response to advertisement of PTA for these licenses, 33 applications were received from all across the world. PTA finally short listed 9 applicants to participate in the bidding. US$ 10 million was to be deposited as earnest money in cash with PTA for being eligible to participate in the bidding. The earnest money was kept mandatory to allow only serious investors. The earnest money of successful bidders was subsequently adjusted towards auction winning price.
The real action is in the in cellular telephony. The number of mobile users has outstripped fixed-line subscribers and cellular is sure to make further gains with new operators joining the existing players. According to Pakistan telecom sector experts, cellular phone connections are growing at the staggering 150% annually. Since July 2003, PTA has handed out more than 200 fixed, mobile and long-distance licenses to different companies. It is believed that operators would pour as much as $ 8 billion into networks and equipment over the next five years.
Additional opportunities that need to be taken into account include the growth of text and multimedia messaging which accounts for nearly 5-10% of telecom revenue around the world. Infrastructure development in situations where capital is constrained and multiple players exist has lead to an increase in the number of secondary companies that offer infrastructure, construction support and wireless network design and wireless specific back haul. This is also an area that local organizations can look into the growth of the telecom sector.
There is also a need to deregulate the growth of Broadband, WLL hotshots and ability to deliver multi megabits service, which can be a viable option in a growing market like Pakistan. Arrangements should be made to spread WLL service to rural areas where teledensity is low. Although, major achievements have been made in different telecom areas, the operators should also focus on enhancing teledensity in the rural areas of the country as majority of villages had not been connected so far.
Changes in the hierarchy of the stated owned ISP, PakNet, also bode well for the ISP industry in general. With positive change being made in ISP offering greater national outreach, competition amongst ISPs is sure to rise, leading to improved quality of services for the consumer. This opens up more avenues for private sector organizations to join the fray with the best possible packages to appeal to the local user. The same is the case with the mobile telephony sector, with such new players like Telenor and Warid justifying the opportunities and potential that exists in the Pakistani telecom sector. Telenor and Warid Telecom launched their services with initial investment of millions of dollars are separately claiming to have one million subscribers base. As more choices are made available to consumers and the markets mature with rationalized tariffs, quality of service is likely to improve further.
PROCEEDS FROM PRIVATIZATION TRANSACTIONS
From July 2005 to December 2005
DATE OF TRANSFER
26% (1.326 billion) B class shares of PTCL
Carrier Telephone Industries
Siemens Pakistan Engineering Co. Ltd.
KESC (GOP share holding)
Consortium of Hassan Associates,
Al-Jomaih Holding Co. & Premier
CAPTIAL MARKET TRANSACTION
UBL IPO (4.2%)
General Public Thru Stock Exchange
United Industries Limited
A. Akbar Muggo
Bolan Textile Mills
Bestway Cement Limited
Total ( July 2005 to December 2005)
Total (1991 to December 2005)
Sources: Financial Statements and Auditorís Report of Privatization Commission