PAKISTAN HAS GREAT POTENTIAL FOR FOREIGN DIRECT INVESTMENT
Sep 8 - 14, 2008
Foreign direct investment (FDI) is arguably the most important source of inflow of foreign capital. In addition to filling the savings-investment gap, FDI yields a number of advantages to the host country including transfer of technology and managerial know-how, employment generation, revenues to the government, provision of quality products to consumers, creation of backward and forward linkages, broadening of industrial base and increase in exports.
In order to increase the level of foreign capital inflows, Pakistan has liberalised its trade and investment regime by relaxing governmental controls and offering a number of financial and trade incentives like tax concessions and tariff reductions. Though exceedingly important, the right level of foreign investment is not enough. What also matters is the direction of investment that is, in which sectors it is made.
Over past one decade, Pakistan has opened its economy through privatisation and deregulation and presently it has a very liberal FDI regulatory regime. The regulatory framework for foreign investment consists of three laws: Foreign Private Investment (Promotion & Protection) Act 1976; Furtherance and Protection of Economic Reforms Act 1992; and Foreign Currency Accounts (Protection) Ordinance 2001.
Taken together, these laws protect FDI as follows: One, there is freedom to bring, hold and take out foreign currency from Pakistan in any form. Two, fiscal incentives provided by the government cannot be altered to the disadvantage of the investor. Three, the privatisation of an enterprise is fully protected. Four, no foreign enterprise can be taken over by the government. Five, original foreign investment as well as profits earned on it can be repatriated to the country of origin. Six, equal treatment is provided to a foreign investor and local investor in terms of import and export of goods. Seven, FDI is not subject to taxes in addition to those levied on domestic investment. Eight, foreign currency accounts are fully protected and they cannot be frozen (courtesy the Foreign Currency Accounts Ordinance 2001).
As regards investment policy, all economic sectors including the service sector are open to FDI. Foreign equity up to 100 per cent is allowed. No government sanction is required for setting up an industry in terms of field of activity, location and size except in case of four sectors relating to national security. Under the deregulation policy, government controls on business activity are being relaxed. To avoid double taxation on income earned by foreign investors, Pakistan has concluded agreements with 51 countries. The list includes nearly all the developed economies. However, one area in the regulatory regime which needs a lot of improvement is the protection of Intellectual property rights (IPRs), particularly copyrights.
Despite bringing copyright legislation in conformity with international copyright laws, the government has not been able to curb piracy. This increases the cost of doing business in Pakistan.
Total FDI inflows into Pakistan from 1995-96 to 2005-06 stand at $10.93 billion, which come to $994 million a year. This of course is far below the desired level. In 1995-96, Pakistan attracted the (then) record $1.1 billion FDI, which was mainly due to agreements with Independent Power Producers (IPPs). However, the next year FDI registered a sharp fall as the successive government repudiated agreements with IPPs.
Thus a row was ensued between the Government of Pakistan (GoP) and IPPs, which severely affected foreign investor's confidence in Pakistan. Pakistan's decision to go nuclear in 1998 prompted several countries to impose economic restrictions, which also reduced FDI inflows. The sudden freezing of foreign currency accounts following the nuclear blasts increased the risk of doing business in Pakistan and severely affected FDI. The FDI level improved during last four financial years mainly due to consistent economic policies of the government. In 2005-06, FDI crossed the $3 billion mark for the first time as the total FDI was registered at $3.52 billion.
FDI data released by the State Bank of Pakistan (SBP) indicated that sectors having the capacity to generate employment and give a sizeable boost to the national economy had a weak inflow during fiscal year 2007-08. It is worth mentioning that total FDI to Pakistan during 2007-08, has increased by only 0.3 per cent year-on-year to $5.15 billion and as compared to the corresponding period of the last fiscal 2006-07. In the corresponding period of the fiscal year 2006-07, it stood at $5.14 billion.
From the beverage sector, the foreign investors withdrew $1.7 million during the fiscal year 2007-08 against a total investment of $88.8 million that they invested in the sector during the last fiscal year, thus, depicting a decline of 102 per cent.
FDI inflow into tobacco and cigarettes was down by 98 per cent to only $9.8 million against $389.5 million, sugar by 42 per cent to $9.4 million against $16.2 million, textiles by 49 per cent to $30.1 million against $59.4 million, paper and pulps by 5.4 per cent to $1.1 million against $1.2 million, leather and leather products by 40 per cent to $1.8 million against $3 million and inflow in rubber and rubber products sector was down by 15 per cent to $3.7 million against the $4.3 million that it attracted in the last fiscal 2006-07.
Investment in the petroleum refining sector was also dipped by 52 per cent to $74.5 million against $155.2 million in the last fiscal year. In the fertilizer sector, foreign investors made no investment during the fiscal year under review, against the $3.9 million that they made in the last fiscal year. In basic metals, investment declined by 81.7 per cent to only one million dollars against $5.3 million in last fiscal.
Break-up of investment by sectors further reveal that under the communication head, the telecommunication sector attracted $1.44 billion, information technology $180.7 million and postal and courier services inflows were $6 million. The notable encouraging point in the IT sector was that during the period, software and hardware development fetched $13.7 million and $6.6 million respectively, more than that in the corresponding period of the last fiscal year.
Oil and gas exploration sector during July-June 2007-08 also attracted $634.8 million, which was 16.5 per cent higher than $545.1 million in the corresponding period of the last fiscal year. The trade sector attracted $175.5 million against $173.4 million during the last fiscal year.
FDI inflow in transport equipment (automobiles) during the 12 months of fiscal year 2007-08 stood at $111.5 million with a growth of 121 per cent over $50.4 million recorded in the corresponding period of the last fiscal. In the construction sector, inflow declined by 43.7 per cent to $88.5 million against $157.1 million in the last fiscal year.
The transport sector also fetched 142 per cent more investment to $73 million against $30.2 million in the previous year. The petro chemical sector attracted $27.4 million and mining and quarrying absorbed $42.3 million foreign investment during the period under review.
FDI inflow during the period under review was up by 69 per cent to $78 million in the chemical sector; 18.4 per cent in foods ($43.2 million); food packing was up by 530 per cent ($6.4 million); pharmaceutical and OTC products 18.6 per cent ($45.6 million); metal products 96 per cent ($15.2 million); machinery other than electrical 47 per cent ($5.9 million), electrical machinery 442 per cent ($18.3 million) and inflows in electronics was up by 48 per cent to $27.6 million.
Moreover, the total inflow of foreign direct investment amounted to $ 3.881 billion with privatization proceeds and 3.748 billion without privatization during July-May 2008. The negative growth in telecom sector surprised the market players as the telecom sector attracted record inflow of US$4.878 billion foreign direct investment during last three years since 2005 to 2007.
The total foreign private investment stood at 5.627 billion dollars or -30.2 percent against 3.926 billion dollars while portfolio investment went up to 45.4 million dollars or -95.9 percent against 1107 billion dollars in period under review.
The foreign public investment inflow in equity securities of which GDRs of OGDC amounted to $ 16.8 million or-97.4 percent versus $653.4 during respective eleven months of July-May 2008.
The US has been the single largest investor in Pakistan, accounting for 31.5% of the total FDI in the July - May 2008 followed by UAE (14.3%), UK (11.0%), Norway (5.7%), Switzerland (4.0%), Hong Kong (3.5%), Oman (3.1%), Netherlands (2.9%) and so on.
Communications along with financial businesses have been the major attraction for foreign investors in Pakistan, accounting for 32.9% and 22.7% respectively, followed by energy sector (oil & gas, petroleum refining and power) (17.6%), trade (3.8%), cement (2.5%), personal services and transport equipment (automobiles) 2.2% each.
On the other hand, repatriation of profit and dividend by foreign investors has rapidly increased and during the last fiscal year they transferred some 921 million dollars abroad, the State Bank of Pakistan statistics show. Repatriation of profit and dividend by foreign investors registered a growth of 14.57 percent during last fiscal year. After the current upsurge, the overall repatriation reached 921.4 million dollars during FY08, as compared to 804.2 million dollars in FY07, depicting an increase of 117.2 million dollars. The major share of repatriation has been witnessed in the power sector, which is the most favorite sector for foreign investors and they already have made millions of dollars investment in the power sector due to power shortage in the country.
The central bank's statistics show that investors repatriated some 169.6 million dollars profit from power sector, which went up by 25 percent or 33.4 million dollars in last fiscal year. The financial sector is the second leading sector, where fore some 142.5 million dollars were sent aboard against some 116.1 million dollars in FY07, showing an increase of 26.4 million dollars in FY08. In addition, communication sector is on the third place with a repatriation amount of 96.8 million dollars in FY08, however it is lower than FY07, in which an amount of 152.5 million dollars was sent abroad.
Foreign investors have sent back 82.6 million dollars from oil and gas exploration sector, 51.7 million dollars from petroleum refining sector, 43 million dollars from tobacco and cigarette sector and some 41.1 million dollars from the pharmaceutical sector during FY08.
Repatriation by foreign investors has shown an increase of 59 percent to 804.2 million dollars during FY07 as compared to 504 million dollars sent abroad during FY06. The government has allowed 100 percent transfer of profit/dividend to foreign investors aimed at boosting foreign investment in the country. Nevertheless, foreign investors are enjoying government's investment friendly policies and consistently sending their earnings to abroad.
Financial experts told PAGE that Foreign Direct Investment (FDI) has been instrumental in the development of any country. Pakistan offers unmatchable economic fundamentals and the presence of foreign companies in Pakistan predates the inception of country. Shell started operations in the area in 1903. Imperial Chemical Industries (ICI) established soda ash manufacturing unit in 1942. ANZ Grindlays Bank and Standard Chartered Bank were working in these areas even before independence, they added. Currently, they said that over 250 foreign companies are operating in the country. They have interest in almost each and every sector including pharmaceuticals and chemicals, telecommunications, oil and gas exploration and marketing, power generation, food and beverages, automotive assembly, insurance and banking etc.
They said that good governance, investors' friendly policies of the state, country's positive image abroad, proper infrastructure, and less cost of doing business are pre-requisites for attracting Foreign Direct Investment.
They said that Pakistan has great potential for FDI mainly due to investors' friendly policies adopted by the government. They were of the view that Pakistan must adopt measures to improve its image abroad for which it is also necessary to improve the country's internal situation.
According to them, no foreign company, which entered Pakistan, has ever left the country; rather they have been expanding their operations through expansion and diversification. Even at the time of nationalisation, all the foreign investment was exempted from the purview of nationalization whereas in many countries foreign investment has been the first to be nationalised.
Mobile cellular operators have made investment worth over 2,000 million dollars in 2007, realizing huge market potential in the country, an official of the Pakistan Telecommunication Authority said.
"The exceptionally good response of market and ever increasing potential has kept the foreign investors still eyeing for opportunities to invest in Pakistan", he said. He said China Mobile the largest mobile operator in Asia has entered mobile market by investing almost 704 million dollars and has bought Paktel Limited.
The official said China Mobile's takeover of Paktel is promising move that is believed to bring the life back to the company. Similarly, he said, Singtel who has been trying to enter the telecom sector has finally got successful by buying 30 per cent shares of Warid Telecom and has invested almost 758 million dollars.
Telecom companies have invested over 8 billion dollars during the last four years particularly the mobile sector whose investment share accounts for 73 per cent.
It is expected that the trend of investment may continue in the next few years because large potential market still exists in Pakistan and all operators intend to grab their share.
Telecom sector has emerged as the largest recipient of Foreign Direct Investment (FDI) during the last few years. Liberalization and competition in the sector has compelled many companies to expand their infrastructure across the country, he added.
K.M. Properties, a well known Dubai based Group for lucrative investments and huge returns have shown interest for investment in the country's read estate and tourism sectors.
The Group arranged road shows in Islamabad and Lahore for Tamani & Arts Royal Suites and offices Dubai (Business Bay).
Talking to PAGE, country's leading industrialist from Mardan (NWFP) and Chairman Universal Group Nasim ur Rehman said that there was immense business potential in Pakistan and the need of the hour is to pay attention on maintenance of law & order situation and overcoming electricity crisis. He was of the view that Pervez Musharraf's departure from power is leaving positive impact on the country's economy. The government should take the business community on board to devise a joint strategy to give a jump-start to the country's economy.
He said that K.M. Properties is planning for investment in construction of hotels, plazas and real estate sector.
The Lahore Chamber of Commerce and Industry (LCCI) has severely criticized the government for making a whopping 31-per cent increase in already high electricity rates and termed it last nail in the coffin of industry.
The Lahore Chamber of Commerce & Industry (LCCI) President Mohammad Ali Mian said that anti-industry and anti-masses steps on the dictates of IMF, World Bank and other donor agencies would not only earn a bad name for the government but also bring the industrial wheel at a halt.
The repeated increases in the power tariff have already played havoc with the manufacturing sector and any fresh orders from abroad have become a dream and all this is because of high cost of doing business. "Who would place an order with you when he is getting same quality goods at lesser prices from the other countries", he questioned.
Mohammad Ali Mian said that at a time when some of the Indian States are providing subsidized electricity at Rs 2.50 per unit, one could well imagine the situation of Pakistani industry. He suggested the government to come out of the pressure of IMF, WB and other donor agencies and devise home-grown policies keeping in view the ground realities if it wants results in economic terms. He said it seemed that the world donor agencies do not want economic stability in Pakistan and the recent decision about raise in tariff is a big question mark on the government's ability to run the day-to-day affairs independently.
The LCCI President said that at a time when on the one hand China is staring in the eyes of Pakistani businesses and on the other hand India is striving to throw Pakistan out of global markets such decisions would left Pakistani businessmen with no other option but to close down their businesses. He said that Pakistan has World's third largest coal reserves but no attention has so far been given to tap them for the purposes of electricity generation.
Further, data released by UNCTAD, the Geneva-based UN body, says global foreign direct investment (FDI) grew to an estimated $1.5 trillion in 2007.
"Increased corporate profits and an abundance of cash boosted the value of the cross-border mergers and acquisitions that constitute a large portion of FDI flows," UNCTAD says. It adds: "the financial and credit crisis that began in the latter half of 2007 has not affected the overall volume of FDI inflows."
Last year FDI flows to developed countries grew for the fourth year in a row to $1 trillion, with the United States retaining its spot as the largest single recipient. At the same time, the European Union as a whole continued to be the largest host region, attracting almost 40 per cent of total FDI flows in 2007.
Foreign investment flows to developing countries and transition economies not only raised last year by 16 and 41 per cent respectively, but also reached new record levels. In addition, FDI to Latin America and the Caribbean raised by 50 per cent to a record $126 billion, with major economies Brazil, Chile and Mexico witnessing a doubling of inflows.
In addition, FDI to South-East Europe and the former Soviet republics increased significantly by 41 per cent to a record $98 billion, and inflows to South, East and South-East Asia continued upward reaching a new high of $224 billion.
UNCTAD also reported that investment remained "relatively strong" last year in Africa, where "an unprecedented level of inflows ($36 billion) was supported by a continuing boom in global commodity markets."
Meanwhile, the agency noted that overall FDI flows declined by 12 per cent in West Asia (Middle East), adding that "Turkey and oil-rich Gulf States continued to attract the most, but geopolitical uncertainty in parts of the region affected overall flows.
While 2007 posted record highs for many regions, the outlook for this year is more modest. "Continuing global external imbalances, sharp exchange-rate fluctuations, rising interest rates, and increasing inflationary pressures, as well as high and volatile commodity prices, pose risks that may have a chilling effect on global FDI flows," UNCTAD added.