Foreign Direct Investment in Pakistan

Foreign Direct Investment:

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative).

Who can be a foreign investor?

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:

An individual; A group of related individuals; An incorporated or unincorporated entity; A public company or private company; A group of related enterprises; A government body; An estate (law), trust or other societal organization; or Any combination of the above.

What are the foreign direct investment incentives in Pakistan?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:

Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally-based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; low corporate tax and income tax rates in Pakistan tax concessions/exemptions to particular businesses Special economic zones developed by the government of Pakistan. Cheap labor in Pakistan. Job training & employment subsidies Infrastructure subsidies Research and Development support Early Entry Advantage.

Foreign Direct Investment in Pakistan:

Pakistan has a very fruitful market for foreign investors having its very large consumer base of more than 180 million people. People need food, energy and other amenities to live and thrive. There is a great potential in the power and infrastructure sector and in natural resources. There seems to be huge scope for investment in hydel and coal based power projects, alternative energy like wind power, and natural gas transmission from foreign lands. The country also needs infrastructure, world class education systems, exploration of its natural resources and mechanization of industries. Foreign investors can exploit all such opportunities. Economists said the significant boost in the FDI numbers is a positive sign for the struggling economy of the country. This has revived investor confidence about Pakistans economic prospects. They believed the multinational companies are showing interest in big ticket investments as much growth in investment in Pakistan came from a sharp rise in reinvested earnings, suggesting that companies already in Pakistan were choosing to expand. The inflow of foreign direct investment rose to $1.447 billion in 2012-13.

FDI during last Ten years in Pakistan:

i) FDI in 2003-04:
Total FDI recorded in 2003-04 was $ 949.4 million. Oil & Gas Explorations, Communications, Telecommunications and Financial Business were the four major sectors which accounted for almost 80 percent of FDI inflows in the country.

ii) FDI in 2004-05:

Total FDI recorded in 2004-05 was $ 1,524.0 million. Oil & Gas Explorations, Communications, Telecommunications and Financial Business were the four major sectors which accounted for almost 80 percent of FDI inflows in the country.

iii) FDI in 2005-06:

Total FDI recorded in 2005-06 was $ 3,521.0 million. Communications and Telecommunication registered an enormous gain in investment in contrast with the previous years.

iv) FDI in 2006-07:

Total FDI recorded in 2006-07 stood at $ 5139.6 million. The communication sector (including Telecom) spearheaded the FDI inflows by accounting for 34.2 percent stake during July-June 2006-07 followed by financial business (20.9 percent), energy including oil & gas and power (14.1 percent), and food, beverages and tobacco (11.8 percent). These four groups accounted for almost 80 percent of FDI inflows in the country.

v) FDI in 2007-08:
Total FDI recorded in 2007-08 stood at $ 5,409.8 million. The communication sector (including Telecom) spearheaded the FDI inflows by accounting for 30.4 percent stake during July-June 2007-08 followed by financial business (22.6 percent), energy including oil & gas and power (16.6 percent), and trade (4.9 percent). Three groups namely; communication, financial business and oil & gas exploration accounted for almost 67 percent of FDI inflows in the country.

vi) FDI in 2008-09:

Total FDI recorded in 2008-09 stood at $ 3,719.8 million. Pakistan has witnessed a substantial fall in FDI inflows in 2008-09. The case of Pakistan is exacerbated by the deteriorating security environment. The overall foreign investment during the first ten months (July-April) of the current fiscal year has declined by 42.7 percent and stood at $ 2.2 billion compared to $3.9 billion in the same period of last year. The communication sector (including Telecom) spearheaded the FDI inflows by accounting for 27.3 percent stake during July-April 2008-09 followed by financial business (22.4 percent), energy including oil & gas and power (22.7 percent), and trade (4.9 percent).

vii) FDI in 2009-10:

Total FDI recorded in 2009-10 stood at $ 2150 million. In line with a sharp decline in global flows of Foreign Direct Investment (FDI), which fell 32 percent in 2009 according to estimates of the International Institute of Finance (IIF), direct investment from this source saw a steep reduction in Pakistan. For the period July to April 200910, FDI totalled US$ 1.8 billion as compared to US$ 3.2 billion in the same period of FY09. This represents a decline of 45 percent. A large part of the decline in FDI for the period was recorded under Telecommunications (a net decline of US$ 607 million), and Financial Services (a fall of US$ 548 million). Combined, the decline in these two sectors, which related to a few lumpy transactions, last year, amounted to 81 percent of the overall reduction in FDI in 200910. Investment levels in some sectors remained healthy, including in Oil and Gas exploration (FDI of US$ 605 million), Communications (US$ 222 million), Transport (US$ 104 million), Construction (US$ 86 million), and Paper and Pulp (US$ 81 million). Despite a steep decline, inflow of FDI into Financial Services was recorded at US$ 133 million for the period.

viii) FDI in 2010-11:

Total FDI recorded during 2010-11 was $ 1,634.8 million.FDI was dropped this year as compared to previous year. However, investment levels in some sectors remained healthy, including in Oil and Gas exploration, Communications, Transport and Construction.

ix) FDI in 2011-12:

Foreign Direct Investment stood at $ 812.6 million during 2011-12 as against $ 1634.8 million last year. The capital flows were affected because of global financial crunch and euro zone crisis. Oil and Gas

Exploration remained the major sector for foreign investors. The share of Oil and Gas Exploration in total FDI stood at 70 percent.

x) FDI in 2012-13:
Foreign Direct Investment (FDI) in Pakistan stood at $ 1447.3 million. Oil & Gas Exploration remained the major sector for foreign investors. Pakistan during last few years could not attract FDI as per potential of the country due to number of reasons which included both internal and external factors, now the situation has improved, there is stability in the system, new government has a comprehensive plan to create investment friendly environment and to attract foreign investors in the country. As is evident that post 2013 election, the capital market crossed 21,000 plus points emitting positive signals for restoring the investors confidence.

Foreign Direct Investment inflows in Pakistan ($Million)

Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 (July-Aug) Total Greenfield Investment 357.00 622.00 750.00 1,161.00 1,981.00 4,873.20 5,276.60 3,719.90 2,150.80 1,634.8 820.7 1447.3 105.4 24,899.7 Privatization Proceeds 128.00 176.00 199.00 363.00 1,540.00 266.40 133.20 0.00 0.00 0.00 0.00 0.00 0.00 2,805.60 Total FDI 485.00 798.00 949.00 1,524.00 3,521.00 5,139.60 5,409.80 3,719.90 2,150.80 1,634.8 812.6 1447.3 105.4 27,695.3 Private Portfolio Investment -10.00 22.00 -28.00 153.00 351.00 1,820.00 19.30 -510.30 587.90 344.5 (46.9) 119.5 77.1 2,899.1

FDI ($ millions)
6000 5000 4000 3000 2000 1000 0 FDI ($ millions)

Sector Wise FDI Inflows ($ Million)

Sector Oil & Gas Financial Business Textiles Trade Construction Power Chemical Transport Communication (IT&Telecom) Others Total including Pvt. Proceeds Privatisation Proceeds FDI Excluding Pvt. Proceeds 200708 634.8 1,864.9 30.1 175.9 89.0 70.3 79.3 74.2 1,626.8 764.5 5,409.8 2008-09 775.0 707.4 36.9 166.6 93.4 130.6 74.3 93.2 879.1 763.4 3,719.9 2009-10 740.6 163.0 27.8 117.0 101.6 (120.6) 112.1 132.0 291.0 586.3 2,150.8 2010-11 512.2 310.1 25.3 53.0 61.1 155.8 30.5 104.6 (34.1) 416.3 1,634.8 2011-12 629.4 64.4 29.8 25.3 72.1 (84.9) 96.3 18.7 (312.6) 282.6 820.7 2012-13 559.6 314.2 10.0 5.7 46.0 28.4 (47.6) 44.1 (385.7) 872.6 1447.3 2013-14 (July-Aug) 60.7 2.4 2.1 2.1 5.0 (7.4) 31.1 (0.3) (24.8) 34.5 105.4

133.2 5,276.6

0.0 3,719.9

0.0 2,150.8

0.0 1,634.8

0.0 820.7

0.0 1447.3

0.0 105.4

Why is there a decline in FDI?

The finance minister of Pakistan, during his budget speech in early June 2012, provided three reasons for the slow performance of the various sectors: global economic crisis, declining security situation in Pakistan and the flood situation. Undoubtedly, there was a global economic crisis, which peaked during the latter part of the previous decade. However, there has been a steady recovery, especially relating to the global FDI outflow. According to the Global Investment Trends Monitor of the United Nations Conference on Trade and Development (UNCTAD), the global foreign direct investment outflows rose by 16 per cent in 2011, to an estimated US$1.66 trillion, surpassing the pre-crisis level, but still 25 per cent short of the 2007 peak. The overall FDI outflows of the US -the largest FDI source for Pakistan- has increased to the pre-crisis period, and so has the outflows of the UK, Italy and the Gulf countries, such as Bahrain, Kuwait, Qatar, the UAE and Saudi Arabia, who are also the sources of Pakistans FDI. Clearly, there has been a crisis, but the FDI outflows of the countries, which have been traditionally investing in Pakistan has recovered. Hence, drying of resources cannot be a major reason for the sharp decline of FDI in Pakistan. So, there is a need to look beyond the reasons behind the decline of the FDI in Pakistan. Three reasons could be put forward as reasons for this decline. First is the failure of the government to 4

augment the macro-economic situation. It is no coincidence that the decline has accelerated under the government. Though the security situation has remained tense within Pakistan, one should not ignore the fact that the government is the longest serving democratic government in the history of Pakistan. Despite the deteriorating security situation, there was relatively better political stability, which the government has now squandered. What was the last major economic initiative that the PPP government attempted since it took over? The government did not give adequate attention to the economic sector, which resulted in an overall decline in all sectors, including foreign investment. The second reason is the failure of the government to augment the energy sector. The energy crisis in Pakistan has heightened in the last two to three years; there has been continuous load shedding and power riots all over Pakistan, especially in Punjab. This in turn is bound to affect all the sectors manufacturing to transport, where there has been considerable FDI inflow. Finally, the most important reason for the decline in the FDI is the faulty approach of the government vis-vis the international investors. In fact, the energy sector itself has substantial scope to invite substantial FDI. Unfortunately, the way in which the government has dealt with independent power producers is affecting the FDI inflow for this crucial sector. The investment in the telecom sector, which has been the major recipient of FDI, is slowing down considerably. While, there are other reasons, such as the saturation of cellular teledensity and failing average revenue per user, it is the legal cases between the government institutions (Pakistan Telecommunication Ltd in this case) and the investors that are also factors encouraging the latter in their decision to disinvest, as has been the case with the Pakcom, which has started disinvesting since 2010.

Sheraton Hotel packing their business in Karachi:

Sheraton Hotel Karachi will close its doors in December this year. The famous property will be taken over by the Swiss hotel chain Mvenpick from Jan 1, 2014 and will be renamed as Mvenpick Hotel Karachi. The decision to end the deal with Starwood Hotels and Resorts, which runs the Sheraton brand across the world, has been taken by the Arabian Sea Enterprises Ltd., the owners of the Sheraton Karachi Hotel, which has decided not to renew the contract with the former after it ends on Dec. 31. Instead, the company, owned by the Kuwait Investment Authority (KIA), has decided to enter into a 15year deal with Mvenpick Hotels and Resorts - a Swiss-based international upscale hotel management company. Sikander Mahmood, CEO of the Arabian Sea Enterprises Ltd., said that the main reason for not renewing the contract with Starwood was that Mvenpick offered a deal which had softer terms and was more lucrative financially. It has been a tough time for the hotel industry after 2005, and the economic meltdown coupled with growing security concerns as well as unfavorable government policies has forced the owners of the hotel not to extend the contract with Sheraton, and hence they have opted for a deal which has softer terms and is more lucrative financially, He added that in 2005, the revenue from international guests made around 8-10 percent of the hotels total revenue, but the number has now fallen to less than 1 percent.Even the international airlines are not 5

coming in overnight the revenue decline is massive, he said, adding if the situation had been feasible, the company would have not thought twice and renewed the contract with Sheraton.

References:
thenews.com.pk/Todays-News-3-196281-Pakistan-attracts-$607m-FDI-in-July Board of Investment, Pakistan Economic Survey 2012-13, Ministry of Finance, Pakistan thenews.com.pk/Todays-News-13-25226-Sheraton-to-say-goodbye-to-Karachi Wikipedia.org ipcs.org/article/pakistan/pakistan-declining-foreign-direct-investment-3643.html