FOREIGN INVESTMENT IN COMMUNICATION SECTOR
Manager Research, PAGE
Mar 03 - 09, 2008
Foreign investment is a major source of private external flows for developing countries. During the last two decades countries have liberalized their investment regimes and pursued investment- friendly economic policies to attract investment. The investment has triggered technology spillovers, assisted human capital formation, contributed to international trade integration, helped in creating a more competitive business environment and promoted enterprise development.
The success of foreign investment policies can be judged by the size of the inflows of capital. Pakistan has been making efforts to attract foreign investment and such efforts have been intensified with the advent of deregulation, privatization, and liberalization policies initiated at the end of the 1980s. The amount of foreign investment rose from a tiny US$10.7mn in 1976/1977 to US$5.14bn in 2006/07. During July-June 2006-07, FDI in absolute terms rose by US$1.62bn and portfolio investment by US$1.46bn over the corresponding period of 2005-06, when these stood at US$3.52bn and US$351.50mn respectively. Therefore, on balance, total foreign private investment in the 12-month period shot up by 79.3% to US$6.96bn from US$3.872bn in the same period a year ago. According to break-up of the foreign investment figure, developed countries made a total investment of US$4.7bn - FDI US$2.99bn and portfolio investment US$1.71bn. The developing economies invested US$1.805bn (FDI US$1.71bn and portfolio investment US$95.2mn). Among developed countries, Western Europe made a total investment (FDI and portfolio) of US$2.78bn and the European Union invested US$2.71bn compared to investments of US$831.3mn and US$396.5mn respectively in the previous fiscal.
In the past few years, the communication sector has witnessed much of the foreign inflows. The investment in the sector has grown from a meager US$13mn in FY02 to US$1.89bn in FY07. Thus between FY03-FY07 the investment in communication sector witnessed a compound annual growth rate of 197%. The maximum investment came in FY06 when it touched US$1.93bn. At the end of the current six month of the fiscal year, the investment has crossed US$700mn and is all set to move ahead. As a percentage of total investment, the communication sector investment has grown from 3% in FY02 to 35% in 1H/FY08. It touched a high of 55% in FY06 and a second high of 37% in FY07.
One must remember the olden days when having a fixed telephone connection was taken as a privilege and a mark of elitism. People were used to wait for long to get a landline telephone connection and sometimes to no avail even after years spent on waiting. Many of us might remember the days when an aristocrat was accompanied by a person with a large mobile set in his hand and it was not much back in the past. Then telecommunication advancement started taking place in the country and geared up with the start of the new millennium.
Out of the total US$722mn investment in the communication sector, telecom sector attracted US$654.30mn Foreign Direct Investment that has been 32.64 percent of the total overseas resources injected into Pakistan economy during the first half of current fiscal year. The telecom sector contributed US$363.9mn in the first quarter, July-September 2007 and US$290.4mn second quarter, October-December 2007.
In 2005-06, telecom sector received US$1.824bn FDI and emerged as main sector of the economy with 35.60% share in the total FDI. Since liberalization in 2004, Pakistan Telecom Sector has been major contributor to the FDI as reforms made it attractive for many global telecom giants who had invested in Pakistan.
The cellular and WLL operators have been pumping money into the sector to expand network and exploit its full potential. They have been adding subscribers in huge numbers to their network every month as total users of six cellular operators have touched 78mn in January 2008 from half a million in 2004. The wireless operators have also shown exceptional growth in recent times and all the companies have been investing to attract more and more customers. In January 2008, the total number of users in WLL has gone up to 2,200,559 from 2,123,179 in December 2007.
FOREIGN DIRECT INVESTMENT POLICY FOR TELECOM SECTOR
Pakistan allows foreign investment on a repatriable basis in the services sector of which telecommunication is one. Foreign investment is allowed in any activity subject to condition that services which require prior permission or license from the concerned agencies. The list of deregulated services within telecommunication sector is as follows:
* Email/Internet/Electronic Information Services (EIS)
* Data Communication Network Services
* Trunk Radio Services
* Cellular Mobile Telephone Services
* Audiotex Services
* Voice Mail Services
* Card Pay Phone Services
* Close User Group for Banking Operations
* International Satellite Operators for Domestic Data Communications
* Paging Services
* Vehicle Tracking System (VTS)
* Burglar Alarm System (BAS)
* Global Mobile Personal Communication System (GMPCS)
Government of Pakistan introduced several measures to attract more foreign investment in the services sector generally and particularly in the telecom sector. In order to attract foreign investment the Government of Pakistan reduced the minimum amount of foreign equity required from US$0.5mn to US$0.3mn in the year 2000 for all activities in the services sector. In the year 2004 Government of Pakistan has further reduced the minimum amount of foreign equity requirement from US$0.3mn to US$0.15mn. Since the telecom sector has been declared as an industry in the year 2004, for this sector there is no minimum requirement of the foreign equity to start the business in the telecom sector.
Foreign Direct Investment is considered a driving force for globalization in every region of the World and the rise of the foreign investment in services sector is creating new source of competition in developing countries. Attracting Foreign Direct Investment is the top priority of the current government in Pakistan.