FALLING FOREIGN INVESTMENTS
Aug 9 - 15, 2010
With an amazingly high teledensity and a fast dropping foreign investment level, the telecom sector gives mixed signals to the already struggling Pakistan's economy. The overachieved teledensity targets reflect domestic market strength. On the other hand, the drop in FDI spells tougher times for this important industry. In the absence of any worthwhile capital formation, the sector has thrived on strong domestic demand continuously generated partly by the cheap connectivity option (for the masses in the shape of cellular phones) and partly by persistent marketing effort of the industry. Pakistan Economic Survey 2009-10 mentions in its report on telecom sector:
"The year 2009 has been a tough patch for Pakistan's economy in general, the ripple effects of which reached the telecom sector as well. Although the aftermaths of precarious security situation and unstable political and economic condition have slowed down the pace of telecom growth, yet timely interventions by the authority and extraordinary efforts by telecom companies have ensured that the sector maintains at least a linear growth pattern."
A nation of around 174 million enjoys a teledensity of more than 63 percent. The telecom revolution has been led by cell phone users who form more than 97 percent of the entire consumer base. Fixed landlines having become the things of the past are now restricted to offices and remotest areas. Use of Wireless Local Loop (WLL) is restricted to offices and highly educated segments of the society. Unless real literacy rate improves dramatically, we cannot expect any cellular-like jump in the growth of WLL subscriber base. Fixed lines and WLL jointly account for around four percent of the cumulative teledensity of 63.5 percent.
FDI IN TELECOM SECTOR (MILLION US$)
YEAR TOTAL FDI FDI IN TELECOM SECTOR %AGE OF TELECOM FDI TELEDENSITY % 2001-02 485 6 1.26 3.66 2002-03 798 14 1.69 4.31 2003-04 980 207 21.13 6.25 2004-05 1,524 494 32.44 11.89 2005-06 3,521 1,905 54.11 26.26 2006-07 5,140 1,824 35.48 44.06 2007-08 5,410 1,439 26.60 58.90 2008-09 3,720 815 21.91 62.00 2009-10 2,205 374 16.96 63.50
A glance at the growth figures given in the table might give one an impression of stagnancy or even a downturn. The factoring-in of the global recession triggered by the infamous financial meltdown, however, might well alter the negative perception about sector's growth potential. Sudden long strides taken by the teledensity after 2002-03 appear to have changed into a snail-paced forward movement after 2007-08. This might suggest that the maturity level is around the corner. But real answers to such questions will only emerge after the dust of global recession settles down. During the peak 3-year period (2005-08), the sector attracted $5.168 billion as foreign direct investment. A number of foreign telecom companies entered the highly competitive Pakistan market to offer a wide range of service products. The continued entry of market players and the rising heat of competition resulted in windfalls to the subscribers who enjoyed and are still enjoying varieties of services at easily affordable prices with an option to swiftly switch over from one brand to another. During the last two years, the sector has received an FDI of $1.189 billion. The local job cuts coupled with the fast drop in FDI impart an element of uncertainty to the growth of telecom sector.
Pakistan's telecom sector has grown at a rate faster than that of India where the teledensity is comparatively much lower. While percentages can be highly deceptive, we should also take into account the capital formation factor on which Pakistan is lagging far behind. The boom the telecom industry has gone through would not appear so promising when seen from this angle. Only a portion of foreign direct investment was utilised in the setting up of infrastructure facilities, while the rest was spent on marketing efforts. The size of resultant capital formation remained far below the actual size of FDI.
Moreover, a major portion of FDI found its way back to overseas in the shape of import cost of telecom equipment/cell phones and profit repatriation.
PTA has a more liberal investment policy for investors in comparison to India. This is, perhaps another way of admitting that Pakistan has limited options to attract FDI as compared to India where teledensity and capital formation have grown in some sort of relationship. Recently, a World Bank and IFC survey on 'ease of doing business' has placed Pakistan at 85th position in a list of 183 countries while India has been relegated to 133rd position. The role of such surveys in improving the image of an economically potential country like Pakistan becomes doubtful especially when some positive aspect emerges as a result of these surveys. Or, perhaps political stability is much more important to foreign investors. The return of foreign investment is therefore subject to the return of political stability. So, it is a long wait for the telecom sector as far as the foreign investment is concerned. Till that time, a more intense focus on domestic market to at least maintain the current growth level is the only option. Once the inflow of foreign investment is restored, the economic managers should ensure that a fair portion of this investment is diverted to capital formation. High teledensity without proper technological advancement is one of the major pitfalls of the growth of this sector.
Setting up of indigenous manufacturing facilities for telecom equipment and cell phones is imperative for sustained growth. But, it will take a lot of doing from both private and public sectors. While attractive fiscal and monetary incentives can be designed and offered to the foreign manufacturers off-hand, the questions of proper infrastructure, outage-free energy supply and law and order situation will always be there to haunt the policy makers.