Pakistan spreads its message for attracting FDI
This article was published in FDI magazine in October 2004
October 20, 2004
The Pakistan government is working hard to attract large scale FDI into the country, including allowing foreign investors to hold unlimited equity and making concerted efforts to project a positive country image. Jules Stewart reports.
Pakistan’s economic track record over the past five years could hardly look more encouraging. Since General Pervez Musharraf’s takeover in 1999, the country has enjoyed a period of rapid expansion that is dazzling even by Asian standards. General Musharraf’s bloodless coup ushered in a team of technocrats led by former top Citibanker Shaukat Aziz, who is now prime minister and minister of finance. The team has managed to drag Pakistan back from the brink of economic disaster.
Foreign exchange reserves have been boosted to more than $12bn from a perilous $300m. GDP grew by more than 6% in 2003-2004, large scale manufacturing expansion topped 17%, inflation was less than 4% and the rupee has become a stable currency. Major multinationals operating in Pakistan achieved between 17% and 88% return on equity and the Karachi Stock Exchange registered the best performance in the Asian region.
FDI rose 19% to $950m last year, although much of that came from overseas Pakistani investors and relates to small scale projects. The sort of big ticket FDI that is flowing into neighbouring China and India remains on the sidelines, holding back over two crucial issues: security and political stability.
Since last year, General Musharraf has emerged unscathed from two assassination attempts, while gunmen also tried to kill Mr Aziz. So far this year, 165 people have died in sectarian violence. Army units are engaged in a bloody battle with tribesmen who are allegedly sheltering Al Qaeda militants in the wild border area of Waziristan. A fledgling insurgency has emerged in the province of Baluchistan, a region rich in power resources. And border tensions with India over the unresolved Kashmir dispute, while seemingly on the mend, remain a potential flashpoint between the two nuclear powers.
Project potential
Yet business leaders on the ground argue that it would be short-sighted to ignore Pakistan’s potential for infrastructure projects and investment in basic industries and services. “The image factor is a deterrent but there is a big difference in perception between those who view Pakistan through their television screens and we on the ground who can appreciate quite a different reality,” says Musharaf Hai, chairwoman and CEO of Unilever Pakistan.
“There are top level changes taking place in the country. Prime minister Aziz is leading Pakistan into the mainstream through economic reforms. In the past four or five years, we have seen steady macro-economic growth and this has provided people with a good degree of predictability. The awareness of the need to engage the business community is at its highest ever level. Yet much work remains to be done in areas like judicial reform, as well as the need to provide state-of-the-art entry points for investors,” she says.
Unilever has been in Pakistan since the country’s inception in 1947 and Ms Hai says that today, more than ever, the population profile makes the country a high growth market, with 60% of the people under the age of 20. “We are averaging a turnover of some Rs20bn [$337m] a year and we rank among the top 10 shares on the Karachi exchange,” she says. “We are seeding the market with soaps and other basic products and our intention is to be in there as the business takes off. All the fast-moving consumer goods majors are slugging it out in this space and you have got to be extremely cost competitive to survive.”
The government has identified telecoms as a key sector for attracting overseas investment. Mobilink, owned by Egypt’s Orascom, has uncovered a vast pool of mobile phone users, with the number of customers soaring from one million to 3.7 million in the past 18 months.
“We will have invested $775m in Pakistan by the end of the year and we now control 64% of the market,” says Mobilink’s chairman Zouhair Khaliq. “We are now in the process of raising $200m from export agencies to help fund our $400m investment programme for next year. Our network now covers 350 towns across the country, some without running water or metalled roads.”
This is one business sector in which foreign operators have been piling into the market. Norway’s Telenor and UAE-owned Warid Telecom were recently awarded GSM licences and two Luxembourg-based groups, Instafone and Paktel, are competing along with state-owned Ufone, which holds a 25% market share.
Mr Khaliq forecasts a tougher market in the future, but one with a great deal of potential. “We now have about six million mobile users in Pakistan and that should double by the end of next year,” he says. Mobilink is also using Pakistan as a springboard into other regional markets, like Bangladesh, where it has just obtained a licence and will invest $100m.
Issues to address
Mr Khaliq recognises the need to address certain fundamental issues to combat foreign investors’ reluctance. “We need to clean up the legacy of the Afghan extremist elements in Pakistan, which are very vocal and attract a lot of attention from the Western media,” he says. “People should come and see the reality instead of just following events through the media. Overall, the political situation has taken a positive turn with the appointment of Shaukat Aziz, who enjoys a high degree of credibility. The fact is you do not make a $750m commitment, as we are doing, if you do not feel positive about the country’s outlook.”
Minister for Investment and Privatisation Abdul Hafeez Shaikh says the government is focusing on four areas in its bid to attract more FDI: policy regime, investor facilitation, marketing opportunities and improving the country’s image.
“The first area is the policy regime and here we need to look at the bigger picture,” says Mr Hafeez Shaikh. “We operate one of the world’s most liberal investor regimes. We have opened all sectors to FDI and investors can hold unlimited equity. There are no restrictions on the movement of capital or remittance of profits and dividends.
“We are also focusing on investor facilitation to help overcome bureaucratic obstacles. We are aggressively marketing investment opportunities, and to this end, we have appointed about 30 investment counsellors, and we are supporting a dialogue and exchange of ideas with business people round the world,” he says.
Image improvement
On efforts to project a positive country image, Mr Hafeez Shaikh concedes that security is a “legitimate but vastly exaggerated concern”. He says tension has abated with Afghanistan and that in the past two years there has been a dramatic leap forward in relations with India. “Our neighbourhood is improving so the perception is bound to change,” he says. “People now go away with a strong positive feeling. We are a country of 150 million so there will always be pockets of incidents, but it is important to highlight their isolated nature.”
Mr Hafeez Shaikh says that the government has identified critical power and infrastructure projects that offer opportunities to foreign investors. “The quality and quantity of Pakistan’s infrastructure needs to be enhanced,” he says. “To mention only one power sector, we have about 200bn tonnes of coal reserves – an attractive proposition given the price of oil. The average share of coal in power generation is 38% worldwide, while it is less than 1% in Pakistan.”
He says the country’s privatisation programme has shown the international investor community that Pakistan is serious about promoting a market-based economy. “It has now been going for 15 years and, while in the first decade receipts amounted to about Rs6bn a year, in the Musharraf government’s first three years this figure doubled and it is now averaging Rs30bn,” he says. “When General Musharraf came to power, he stated that the government had no business being in business and, to this end, we have virtually privatised the entire financial sector and we are well advanced in utilities, telecoms and large scale manufacturing.”
Economic stability
Government officials point with pride to the stable environment that has been in place, at least in terms of investment environment and economic policies, for the past five years. “There was a time when Pakistan would devalue the rupee twice in one day,” says secretary for industries Mutawakkil Kazi.
“Stability is crucial to attracting FDI and, thanks to legal and economic continuity, we now have investors like the Chinese building a massive power plant next to our coalfields and BP operating gas fields in Sindh province, accounting for 60% of the country’s gas production. The potential is vast in almost every area when you consider that if you discount the seven million households below the poverty line, you still have 20 million others that rank as fully-fledged consumers.”
EPZ expansion scheme
Pakistan’s Export Processing Zones Authority (EPZA) is working on an ambitious expansion programme to help facilitate the government’s drive to attract FDI. EPZA chairman Lieutenant Colonel Syed Akbar Husain is negotiating the start-up of more than two dozen new zones to expand its existing network of four installations. “We are now on the brink of revolutionising the traditional EPZ concept,” he says. “We plan to set up a public-private partnership (PPP) for a new EPZ, called Pakistan Textile City Ltd, to promote investment in textiles, which represents 68% of the country’s exports and accounts for 10.5% of GDP. This is designed to compete in world markets after World Trade Organisation quotas are abolished next year and will focus primarily on dyeing, processing and finishing.”
The EPZA has attracted some top name firms in the textile and consumer goods sectors and is manufacturing for Wal-Mart, Tesco, K-Mart and Spain’s Zara, among others. Lt Col Husain says priority is given to hi-tech and capital and labour intensive projects, and those based on maximising local raw materials. “We offer investors a one-stop service and simplified procedures,” he says. “In return, we provide all basic infrastructure, as well as an abundance of skilled and semi-skilled labour, costing on average from $75 to $500 a month. Our success can be measured in the growth of exports from our EPZs, which rose from $90m to $202m in the past three years.”
Despite the negative press and fears over political stability and security, there is a sense of bullishness on almost all levels. Waseem Haqqi, chairman of the Board of Investment (BOI), claims that there are no longer any grounds for investors to feel uneasy. “No foreign business interest or executives have ever been targeted by terrorists and, moreover, we have shown our ability to root out the militants, with the arrest of about 600 Al Qaeda militants since 9/11,” he says.
“The atmosphere has definitely improved and proof of that is the fact that multinationals are starting to arrange their board meetings here, whereas in the past they were usually held in Dubai. It is important to remember that even in the dark days of nationalisation back in 1973 no foreign businesses were touched.”
Investment needs
Mr Haqqi says he would like to see investment in five areas: oil and gas exploration and production, power generation, IT and telecoms, agriculture, and small and medium size enterprises. He says that only 3% of Pakistan’s 27 billion barrels of oil reserves have been explored and only 15% of its 380 trillion cubic feet of gas deposits. Shell and Total are two of the foreign majors now working in this area. The BOI has received 35 expressions of interest to develop power plants to add 7000 megawatts to the country’s 19,000 megawatt capacity. There are also plans to seek investment to help construct seven cement plants.
“Side by side with these achievements goes a step change in our bureaucratic procedures,” says Mr Haqqi. In the past two to three years, with the country hit by a crippling drought as well as sanctions, Pakistan implemented a number of sweeping reforms in tariffs, corporate tax, banking, governance and the capital markets, and also raised tax collection from Rs3bn to Rs520bn.
“We are hungry for technology and our hi-tech appetite is unlimited,” he says. “We have identified 15 countries in North America, Europe and Asia that we want to tap for investment in this sector. We are actively sending the message out to the world, and have received more than 100 delegations from 25 countries last year. I am confident that we can attract $1bn in FDI this year and in due course match China’s growth rate.”
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