OICCI'S ROLE IN FDI

Interview: Adnan Afridi, Secretary General OICCI

SADAF AURANGZAIB
Senior Correspondent

Mar 26 - Apr 01, 2007

Overseas Investors Chamber of Commerce and Industry (OICCI) is the oldest chamber of commerce of Pakistan. The chamber's primary function is to promote the commercial, industrial and financial interests of foreign investors engaged in Pakistan. Recent survey conducted by KPMG indicated that the OICCI membership contributes over 11% of the GNP of Pakistan and approx. 32% of the GDP of the manufacturing sector. Between them, they contribute 20% of the total tax revenue of the Government of Pakistan, and directly employ about 100,000 people. We met Mr. Adnan Afridi, the Chief Executive/Secretary General of OICCI who was actively involved in consulting services after being graduated from Harvard. He was also involved in bringing in some of the significant food chains to Pakistan like KFC and Dunken Donuts. His objective is to modernize the chamber and help make it a powerful forum for policy action and debate. Here are his views which he shared with us during his interview with the PAGE.

PAGE: First of all, tell us a bit about Overseas Chamber, its members and its objectives?

AA: OICCI is the oldest chamber in the country formed in 1860. Our role is primarily to protect and promote the interests of our members and those interests are linked to our entire range of stakeholders. Not only commercial interests but we also have social interests in the committees for which our membership works. Our membership has not only contributed in Foreign Direct Investment but also in the areas like employment, improving the environment, investing in social and community projects etc. The Overseas Chamber's primary role is to act as a spokesman for its members and currently our membership base is 168 members. Geographically it represents about 30% from America, 30% from Europe, 15% from the Middle East and the remaining from the Far East. So we have pretty much covered all the major markets. In terms of the sectors of the economy, they represent all the major sectors of the economy. We have members in Pharmaceuticals; we have members in manufacturing, in oil and gas, in financial services. I can give you a couple of interesting statistics to give you a sense of the collective strength of our membership. An investment survey was conducted by an independent auditor and the results indicate that our membership base contributes about 11% of the total GNP of Pakistan and over 33% of the manufacturing GDP of Pakistan so that gives an indication of the strength and the size of our membership base in Pakistan.

PAGE: Talking of FDI, what do you think is the basic driving force behind it?

AA: It's no longer a cliché to say that we live in a global economic community and Pakistan should view not only specific country but to look at the countries as being either potential net investors in the country or there are also trading relationships, Pakistan can also invest in other countries. However being a developing country we are typically competing with other developing countries. The driving force for any foreign investor is going to be a set of factors, I am not saying it in any order of priority but they include first of all the economic potential of the country so they may look at things such as the size of the country in terms of population, the size of GDP, the purchasing power of its citizens, the opportunities in specific sectors. If you look at all those factors Pakistan in the recent past has done quite well. If you compare to regional countries, Pakistan always have a larger population base, we are 160 million and that makes us one of the larger country to invest in. Clearly that's not sufficient in itself because you have to give those people purchasing power for anyone to come in and invest in and sell networks and services. Pakistan's purchasing power has increased significantly over the last decade with a GDP growth of about 7% over the late three or four years. We have seen our purchasing power, GDP per capita has gone to almost 850 to 900 dollars. I think the purchasing power adjusted fix about two and a half thousand dollars. That again is a reasonable number to attract any foreign investor. To give you an example, you have seen a lot of cellular companies recently testing in Pakistan and why are they doing that because they are looking at the total size of the population and they then look at the number of people who can afford mobile phones and when these two things match, the result is that Pakistan has been the fastest growing cellular market in the world, not only in the region but across the globe.

PAGE: How do you see the State Bank's efforts and instance in regulating policies for FDI?

AA: Both the private sector and public sector need to look at what are the sectors that have been successful in attracting FDI in Pakistan because clearly not all sectors have been equally successful. A lot is talked about the fact that the major foreign investment has come in the financial services sector and telecommunication sector. Both these sectors have a common theme which has led to FDI. First, it has been the implementation of the deregulation policy of the government so the government has deregulated, it has liberalized them, and it has privatized any state owned player operating in this sector. In addition to that the government has appointed a regulator in both these sectors. We have the State Bank in the financial services sector and we have PTA in telecommunication sector. And both these sectors are now manned by a very professional team. State Bank here plays two roles; it is primarily a regulator for the financial services sector. If you look at its role in that, it has been highly successful. I think the State Bank is very well regarded by the other state banks around the world. The previous and the current governors both have excellent credentials and have tremendous respect both in and outside the country. They remained successful to spearhead financial reforms and attract foreign investment by providing a level playing field for all players. State Bank also has a second role which is to monitor the progress of the economy. Of course, it has some tools such as monetary policy etc which it can use to curb inflation which is a threat to growth. The State Bank has been playing a very active role recently and trying to control inflation through monetary policy. In addition to that of course things like stability of currency, improving reserves, etc. are the functions of State Bank and the indicators suggest that things are moving in the right direction.

PAGE: Well, by giving the chance to foreign investors to hold local projects on 100% equity basis, do you think it does also have any negative impact?

AA: First, let's talk about the concept of privatization because clearly there are two schools of thought. I think the perspective of our foreign investors who I represent is that the government should not be in the business of running businesses. The government's role is to frame competitive world class policy and it is to have regulators in place to ensure that no distortion is taking place in any sector of the economy. The role of the private sector is to run businesses. Now whether that private sector participant is a local investor or a foreign investor, from a pure economic perspective, it should make no difference. State owned enterprises are getting privatized but local investors have an equal opportunity to participate in those privatizations. In fact, if you look at some of the medium to smaller size privatizations particularly the fertilizer sector in the recent past, those are all being purchased by local entities which is a good sign. When it comes to larger privatizations such as PTCL, some of the banks, I think it is the question of appetite and it is the question of capital. Foreign players tending to have larger balance sheet, have a larger commitment to diversification and growth and keenly participating in it but many of them have got local partners, so local partners also participated to the extent of their risk appetite. The notion that all our state owned enterprises are going to foreigners only tells half the story. Our strategic interests are still safeguarded because those assets still reside in Pakistan so whether you have a bank which is owned by a foreign company, it does not mean that it's got to get up and run away and go to that foreign land. The bank is in Pakistan, it is catering to Pakistani consumers, and it is manned by Pakistani employees. All it is doing is that you are getting transfer of best global practices into your country which is a good thing so we are very much in favor of the privatization program but we do maintain that it is a level playing field where local and foreign investors have an equal opportunity to invest.

PAGE: And there shouldn't be any limitation to it?

AA: Depends on what you mean by limitation. Clearly if there are strategic assets which could influence the potential security of your country then certain safe guards are clearly and I think the government has thought that through and safeguards are put in to ensure that those are protected but from an economic perspective I don't think there should be any limitation.

PAGE: What is the composition and quality of FDI in Pakistan, which sectors does it cater the most?

AA: Well in the recent past, the two sectors that have seen significant foreign investment is telecommunications and financial services however we are now seeing growing interest in the Real Estate sector. I think manufacturing to some extent has lagged behind and there are reasons for that; couple of which are perceived cost of doing business in Pakistan clearly because we are an economy in transition and we are going away from the notions of subsidies, clearly what that is doing is pushing up our power and our gas and our utilities which influences the manufacturing cost. In addition to that we have to improve our record on protection of intellectual property right because that has a very direct link to o investment coming in particularly in sectors such as pharmaceuticals which are very highly researched and development oriented but I think if we get those rights we will see more foreign investment in the manufacturing sector as well so clearly at the moment the composition is more towards services and less towards manufacturing.

PAGE: And do you think it's also growing?

AA: Foreign investment has shown significant growth. In the current year projections are that it will cross 6 billion dollar mark which is basically a 100% growth over last year.

PAGE: How do you see the role of FDI in helping the economy towards reaching high rate of growth while on the marginal side which sectors are progressing because of it?

AA: FDI has a range of linkages. First it represents foreign capital coming into the country that helps Pakistan foreign currency reserves. It helps Pakistan to finance its current account deficit and therefore keeps stability to the economy, to the currency and to the macroeconomic picture. FDI has a very big role to play in helping stabilized and improved the macroeconomic indicators of any country including Pakistan. In addition to that, FDI has a multiplier effect in the economy. Particularly what large foreign investment that comes in any sector of the economy do is that because of the size of the investment and because of the best practices that are practiced by that comes in Pakistan, the value chain which is supporting that particular industry also starts to modernize and transform. For example, for many years now we have significant investors in the auto sector from Japan, which is known to be a world leader in the auto industry. Over these years, the fact that we had Japanese manufacturers in Pakistan has led to the creation of an entire vendor industry to the auto industry. That vendor industry has over the years improved its quality of manufacturing, it improves service standards by having an interface with the Japanese manufacturers and today this vendor industry has the capability to actually export. Another example which is a recent one and they are happened to be our members "MACRO" has recently launched in Karachi which is a retail operation where it allows the wholesalers and the families to come and purchase their grocery items and their monthly items on a bulk basis. I have personally spoken to the chief executive of the MACRO who said that since they have started operations, the vendor industry, the supply chain in Pakistan which is always been very fragmented in terms of providing fresh produce, in terms of providing groceries in an unhygienic format has changed significantly. Now you have vendors which are supplying to MACRO using the proper packaging, using the proper preservation techniques and I think that industry is also going to grow significantly. These are two quick examples that I gave where FDI has actually led to the progress of an entire several sets of an industry. Now obviously those several set of industry also generating employment so when any foreign player come into Pakistan, one should not only look into the direct employment that has been provided but the indirect employment so employment is of course a significant beneficiary of FDI.

If we move away from the economic impact, many foreign players that are in Pakistan have a chance to be the leader in the area of Corporate Social Responsibility. That is a notion where company invests a part of their profit; invests a part of their human resource in uplifting the social community in which they exist. Now it is not only a responsibility it is also a good business practice because if society in which you live, if they prosper and their quality if life goes up, your company is also going to benefit from that so am very proud to say that many of our investors are actually leaders of that in Pakistan. Recently the Pakistan Centre for Philanthropy announced its top ten awards for companies which have done the most in corporate social responsibility and four of our members were in the top ten. One of our members "Engro" has actually received an international award for CSR last year so clearly that is another area which is often over looked but I think it s a very important contribution that foreign investors play in Pakistan.

PAGE: Talking of competitors like China, how do you think we can beat our competitors?

AA: Pakistan should probably not be looking at China as a competitor. China is a developed economy which is one of the world's largest economies, now it's an exporter of capital and services so China is one of the leading foreign investor and will continue to increase its investment in Pakistan so I think China is more of a partner than a competitor. When you look at the regional capital flows you have to actually look at the economies which are similar size to yours and in a similar stage of development because those will be your most direct competitors. In those you have to include countries such as Vietnam, a comparison to India is inevitable, we always make it but I again think that it is probably misplaced. Yes, India is a competitor but again Indian economy is much larger than Pakistan's and in fact Indian economy is much more restrictive than Pakistan when it comes to FDI. We are much more open and foreign investors recognize that. What our policy makers have to recognize that while we are probably much more competitive in the traditional matrix used to attract foreign investment such as legislation where we allow 100% dividend, capital repatriation, 100% ownership, I think we have one of the liberal laws with respect to foreign investment in the world but clearly Pakistan also has challenges, there is a risk perception, there is a perception of political uncertainty, there have been instances in the past such as in 1998 when the foreign currency accounts were frozen etc, although these are one of events but they do have an impact on the minds of the investors. So we not only have to be the best in legislation, we also have to beat other competitors in things like intellectual property right, in things like having level playing field, in trying to improve our ease of doing business etc so we have to be the best in those to overcome the other perception challenges in order to attract the same amount of capital.

PAGE: Among deregulation, privatization and liberalization, which policy do you think remained the most successful in bringing FDI inflows?

AA: I think they all work in tandem but deregulation and liberalization are probably more important than privatization. Privatization is of course for a finite period and for a finite set of assets. Once you have sold those, there isn't much else to privatize but deregulation and liberalization are the key drivers moving forward to attract investment because unless you encourage private sector participation, foreign investors like local investors will not come in.

PAGE: What are the hindrances that our foreign investors see while investing in Pakistan?

AA: Well, the current government has been very pro-business and pro-investment. Personalities that are involved in various ministries or on individual level have been extremely effective and helpful. However these actions need to be institutionalized so that any foreign investor coming in is not dependent on any particular person or a personality or a set of people, they should be dependent on the institution. Whether this government is there or another government is there, the policies should remain the same and should be implemented. By and large our policies have remained the same but their level of implementation has varied significantly from government to government, that is what makes an investor weary of making long term investment in Pakistan. Another area would be the coordination amongst ministries and amongst departments. More and more investment requires the interface between multiple ministries and I think the coordination needs to be improved. For example if a particular investor is coming in and the government is trying to make some decision regarding that investor, that decision making influence not only ministry of Finance, but also planning commission and also the ministry of commerce and perhaps the labor ministry. Not all of them tend to move out at the same pace and many projects tend to get delayed because of the lack of coordination between the ministries. I know we have often talked of "One Stop Window", in practice it's of no use. For particular sectors like in Energy Sector, there is a energy board that you can go to and talk about the projects but when you try start to implement those projects, the first thing you need is land, now energy board has nothing to do with that as that falls in another department and then the entire process of coordination starts so that would be a very key area for the government to look at and improve in order to attract investment.

PAGE: According to the definition of FDI, the components on which it is based are equity capital, re-invested earnings and intra company loans. Where actually do you see the inflows are coming in and why is that so keeping in mind that Pakistan is a poor country?

AA: Mostly, all foreign investment has all three components. Most new ones come in the form of equity capital. However every business has optimal capital structure which involves equity, involves debt and much like local investors, foreign investors follow the same path. You may have foreign equity that is coming but then a local company is incorporated and that local company on the strength of its own assets and own business plan can go and borrow from the local banks in local currency. That local currency is not a part of your FDI but it has only happened because the FDI comes in first place so there is a link. I don't think there is any particular trend in Pakistan that one component is more than the other. I guess it follows the normal business practice that the industries or other players follow in Pakistan. In the case of foreign investors where Pakistan has benefited is that most foreign investors which have a long term view on the country have actually re-invested their profits in the country. There is mis-perception amongst the public that investors come in and take all their money out. While they are of course allowed to do that and I am sure that they are happy to do that as part of their normal dividend policy, they clearly do re-invest their profits in the country because they see future growth. As long as the economy continues to grow, as long as you provide opportunities to them to invest, they will invest. Most of our members, if you look at the statistics, they have done significant expansion in Pakistan. Some of our oldest investors such as ICI have recently announced a major expansion of its Soda Ash Plant that represents significant re-investment. If you take some of the cellular companies which have come in to the recent past, every year they are investing half a billion to a billion dollars to new equipment and a new technology. Here am not talking about the imports of handsets or phones, I am actually talking from the point of view of a service provider where they are actually bringing in technology which is growing the networks in our country. These are all examples where there is re-investment taking place by the existing investors. While we need to encourage that we also need to attract new investors. The reason why investment has been more concentrated in particular segments which is financial services and telecom is because of the policy reforms that have been very successful in those sectors. I think the government needs to do the same in other sectors too.

PAGE: Why the government has taken a lot of lucrative measures to attract investment?

AA: First, I don't think that the government is giving any specific exorbitant returns to any particular investor. I think as more and more sectors of the economy are getting deregulated, it's comparative forces is the sources of supply and demand which determine one price of particular product to be sold at and therefore what margins will a particular company be able to enjoy. In fact I think the government is playing a role in making more sectors highly competitive which will actually reduce the margins. To give you an example, five or six years back Pakistan had two cellular licenses and the tariff rates used to be very high. You have four layers right now and the fifth which is 'China mobile' which is the largest cellular company in the world is entering Pakistan. Of course, that is going to bring tariff's down. All those five players happened to be the foreign investors so clearly if the government wanted to give them exorbitant profits, it would be doing the reverse of what is doing right now. So I disagree that the government is doing anything of that sort. The general public needs to understand that profits are not illegal or an immoral motive of any company. As long as those profits are being earned in a legal, competitive, fair and transparent manner, it will ultimately benefit every body. Now of course one must encourage all the companies to not to exploit the consumers and I think the only way to do that is by having competition.

PAGE: How FDI helps in managing the trade deficit and what is the prospective growth of FDI in coming future?

AA: At least at the moment FDI is playing a very big role in managing the current account deficit because clearly we need foreign inflows to be able to pay for our imports. Now that is not a long term solution. In the long term, we have to of course have domestic economic growth and resource mobilization to do that. Now to the extent that FDI in sectors where you can potentially become an exporter, in the long run it will help increase exports. For example, you have the auto industry, currently it is catering primarily to the local market but it will also look at regional countries such as Afghanistan, Iran, Iraq to export cars. Similarly Cement which is primarily a local player but you have foreign players also who are investing in cement plants. Once those cement plants come alive, they will be exporting so to the extent that foreign investors invest in sectors that can become net exporters in the long run, it will also benefit trade deficit.

In terms of the actual flows of the investment, it could be difficult to project what happens in the future. One can only look into the recent trends and the recent trends are very encouraging. The FDI is growing, it is coming in a more diverse form but we need to continue what we have been doing.

PAGE: Keeping in view the current unstable political situation which could have drastic results in the near future, what affect could it impose on FDI?

AA: Well, in terms of the players that have already invested, I think most of our members have been in Pakistan for a very long time and they have seen lots of political changes but they have maintained their investments in Pakistan. What is critical for any investor, existing or potential is that the policies remain consistent and therefore regardless of what happens as long as the policies are consistent, FDI inflows will continue to remain. If the policy is changed then it depends on what the nature of those changes is and then of course it will have a requisite impact.

PAGE: Message to the prospective investors.

AA: The Pakistan's economy provides significant opportunities for both existing and new investors. I would urge all of them to visit and meet our members and see their experiences, and their particular industries and sectors to be able to get a first hand account of what it is like to do business in Pakistan and to clearly remove the misconception that we exist in a very basic economy. The Pakistan's economy in many sectors is highly sophisticated, it is highly competitive but also that's what makes it highly attractive for mature global players to come in.