GROWING QUANTUM OF FDI

Investors focusing on telecom, banking services and oil & gas exploration and production sectors

SHABBIR H. KAZMI, Special Correspondent
Sep 04 - Sep 10, 2006

Foreign direct investment is considered a panacea for low capital and low productivity of the developing countries. Acknowledging this fact, the Government of Pakistan has defined a new strategy to attract investment in general and foreign direct investment (FDI) in particular. The areas which demand massive investment and technology transfer are the focal point of investment strategy. These include oil and gas exploration and production, telecommunication and financial services.

Telecommunication got prominence because a lot many other economic activities are directly and indirectly dependent on this. To attract reputable strategic investors the government followed the policy of awarding licenses in a fair and transparent manner and creating investor-friendly environment. The total FDI during last financial year was US$ 3.5 billion out of which US$ 1.6 billion came through privatization and another US$ 1.9 billion through active participation of foreign investors. A continuation of this trend has been evident with major contribution coming from telecommunication sector alone. The major jump was due to the privatization of PTCL and network expansion activities of the other telecom operators.

After successful completion of the liberalization and deregulation process, the government has adopted prudent and transparent policies. This has created healthy competition, investment friendly environment and new employment opportunities. As a result, the ultimate users in Pakistan enjoy greater access, better quality and services, at very affordable cost. All the performance indicators of the telecom sector show tremendous levels of growth. The most important being the teledensity in the country exceeding 23% at the end of April 2006, as compared to less than 2.5% in 1999-2000.

Foreign investment in the telecom sector crossed one billion dollar mark during first three quarters of 2005-06. The growth patterns in the telecom sector of Pakistan compares well with many South Asian economies. Pakistan's present teledensity level is much higher than India's 13%. These recent figures are the outcome of spectacular performance because India's teledensity in 2003 was 7% and Pakistan's rate was lower than 4.5%.

Pakistan Telecommunication Authority is fully cognizant of the changing telecom sector landscape and emerging challenges. The Authority is making focused, timely and appropriate measures to further accelerate the pace of growth in the sector. Simplified licensing regime, mobile number portability and rural telecom development are few of the initiatives of the Authority for the uplift of the telecom sector in the country. With the commencement of the telecom deregulation policy, the telecom sector is undergoing through a fast pace of development.

The telecom sector may be experiencing tremendous expansion but, it still requires governmental support. Considering this, the Government of Pakistan and PTA initiated a multibillion rupees project by the name of Universal Service Fund (USF), which will help provide the funds to the telecom operators in these deprived areas. A collective contribution to this fund will be made by the telecom operators, as well as by the government and international development agencies. Currently, there are two sources of funds for USF from the telecom operators namely the Access Promotion Contribution (APC) for the USF collected from the international calls terminated on mobile networks and the adjusted gross revenue of LL, LDI and new mobile companies.

Process of modernization of the banking system is well underway in Pakistan. It is on record that Pakistan's banking system has witnessed exceptional changes. In terms of size, structure and ownership, the banking assets doubled over five years touching Rs 3.7 trillion (over $62 billion) by end 2005. Around two thirds of the banking system is with local private banks and 9% with foreign banks. Interestingly, while foreign banks have a low deposit base, foreign shareholding of banks is quite significant. Large foreign presence has the potential to facilitate adoption of international norms and practices.

Standard Chartered Bank through it subsidiary company, Standard Chartered Bank Pakistan Limited, has entered into agreements to acquire about 81% interest in Union Bank Limited for a cash consideration of US$ 413 million. This acquisition will make Standard Chartered Bank the sixth largest bank in Pakistan by market share of assets and will further extend its business in a high growth market. Standard Chartered currently has a network of 46 branches in 10 cities. Pakistan is an integral part of Standard Chartered's Middle East and other South Asia strategy and the acquisition will make Pakistan Standard Chartered the tenth largest geography by income. According to Badar Kazmi, Chief Executive Officer, Standard Chartered Pakistan, "The merger with Union Bank demonstrates Standard Chartered's commitment to Pakistan. The merger reinforces our strategy to be a truly 'pan-Pakistan' bank operating in all four provinces and major cities."

Construction business in Pakistan is also booming. Lately, Dubai Ports World announced to spend $10 billion on transport infrastructure and real estate in Pakistan. Emaar Properties has also recently taken over three realty projects in Islamabad and Karachi. With an investment of US$ 2.4 billion it has embarked on a series of master planned communities that will set new benchmarks in commercial, residential and retail property in Pakistan. International funding is also pouring in.

It may be of some satisfaction for the policy planners that Pakistan has attracted over US$ 3.5 billion FDI last year but there is no room for complacency. Out of the total global FDI movement Pakistan has got only a meager amount. On top of this the inflow has been confined to a few sectors, which gives the investors strong negotiation power. Till recently Pakistan has not been able to attract FDI in textiles and clothing sector, the largest contributor to economy and export. The policy makers also have to come up with policies, which can attract investment in power sector, particularly transmission and distribution of electricity.