ACCELERATING FDI INFLUX

SHY LOCAL INVESTORS FORCE FOREIGN INVESTORS TO FOLLOW CAUTIOUS APPROACH

SHABBIR H. KAZMI
Apr 13 - 19, 2009

A review of the prevailing economic, political and security conditions over the last two years has forced the investors to follow cautious approach when making investment. Most of the investors believe that a market comprising of around 200 million people, with some of the groups enjoying as high as US$ 25,000 offers enormous potential investment opportunities, from bottled water to the most imported foodstuff. However, the consensus is unless local investors take the lead and play the leading role n the joint venture no foreign investors would be keen in parking its funds in Pakistan.

One may feel offended by the word parking used instead of investing. To clarify it suffice to say that foreign investors are like migratory birds and land in those areas which offer security of their investment as well as corresponding return, higher the risk higher the return demanded. While the market offers enormous opportunities the perceived risks are also very high. In such a scenario if participation of local investors is low it passed a very loud and clear message to foreign investors that they should not park their funds.

Once upon a time when Pakistan's equities market was termed 'The Best Performing Market' a lot of portfolio managers and hedge funds were keen in investing in the country. Bulk of such investment was coming under portfolio investment. As the conditions were not disturbing the parking period was relatively longer. However, with Rupee eroding more than 25% value against dollar in one year and business activities disturbed by extensive and intensive load shedding of electricity and gas, government adamant at keeping POL prices and interest rates high forced the investors to review their decision to remain I Pakistan. Another sever jolt was caused to these investors when the government approved imposition of floor and also its prolongation more than 100 days.

According to a strategist, "Most of the foreign investors are reluctant in becoming equity participant in companies. However, they are always keen in acquiring its shares, which they could sell as and when they like. Therefore, the sponsors of public limited companies have to enhance free float of their companies to facilitate buying/selling by the investors. Greater free float also contain volatility of the scrip as any one hardly has the power to set the market direction. In Pakistan, most of scrips are illiquid, which does not allow funds to even consider investing in those scrips".

An analyst is of the view, "Since capital gains are tax exempted scrips enjoying high volatility are liked by some of the local players. Foreign funds are not always interested in picking up such unless the return is more than the potential exchange loss. However, real investors prefer not to invest in such scrips. Ideally, the focus of foreign investors is the companies which enjoy growth potential and also have credible payout history. Though, history cannot guarantee future payout but certainly give the confidence that sponsors are ready to share the profit with shareholders. This phenomenon was evident when a number of companies despite posting loss, pay dividend out of retained earnings".

Yet another analyst was of the view, "Some of the analysts are linking Pakistan's current economic crisis with the global crisis, starting from the US and then engulfing most of the countries. However, Pakistan's crisis has no similarity with the US problem and hardly has any impact on Pakistan. While the US commercial banks and insurance company fall pray to their own legacies, Pakistani banks and insurance companies have mostly remained immune to such extravaganzas to a strong regulatory regime."

According to a foreign investors, "Neither the working environment nor the much talked about security issues are responsible for keeping foreign investors away from Pakistan. It is the attitude of those at the height of helm of affairs, giving a very cold shoulder to investors. Pakistan enjoys most probably one of the highest success rates in oil and gas exploration but fails to attract the key players. It is true that at time security is a issue but most often it is bad implementation of even the best policy, which forces the investors to go to countries which offer even the lower returns. One such example is delay in fixing wellhead prices for the giants like OGDC."

"At present Pakistan faces a shortage of around 5,000MW and likely grow at 15-20% every year. The situation offers enormous opportunity for the local as well as the foreign investors but hardly a few seem interested in availing the opportunity. It is not the difficult operating environment but the circular debt, which keeps investors away from Pakistan. On Top of this, delays in completing the formalities and/or bidding process as well as linking of bulk purchase tariff with the type of fuel used make the entire process complicated. Therefore, unless the discriminatory powers of bureaucracy are curtailed, interference of ministers and ministries curbed decision making will neither be transparent nor speedy", was the consensus view of the investors.

One of the reasons for the tricky policies is to favor the turncoats and those who are willing to grease the palms of those involved in decision making. Over the years permission to establish chemical plants, textile mills, sugar mills and SRO-based lending to such business enterprises was aimed at developing political clout rather than broadening industrial base of the country.

Similarly, 'jialas' were provided job at state owned entities to an extent that those entities not only became 'failed enterprises' but with each change of government, employees appointed by the previous regime were thrown out and new lot of jialas was inducted. Over staffing and induction of incompetents not only deteriorated operations of these enterprises but also resulted in mismanagement and rampant corruption.