Outlook for foreign direct investment By Mohiuddin Aazim

FOREIGN direct investment has declined primarily because of worldwide liquidity crunch during the Great Recession of 2007-2009 and the militant activities in the country. But with the global economic recovery in sight and the militancy somewhat subdued, foreign investors are showing a renewed interest in the economy.

The improving macro-economic indicators and the commitments from international financial institutions (IFIs) and donor countries for funding projects have also helped in rekindling interest of the foreign investor.

The World Bank has agreed to provide $250 million to gas distribution companies to replace the obsolete transmission lines and to reduce line losses. The American Overseas Private Investment Corporation (OPIC) and the International Finance Corporation (IFC) have committed $370 million to Dutch Company, “4Gas”for setting up a terminal at Port Qasim for handling import cargo of liquefied natural gas (LNG).

Last month, a Chinese group of companies signed a memorandum of understanding (MoU) with the Punjab government to build a modern industrial city along with an industrial estate over 100,000 acres. The group intends to invest up to $50 billion in Punjab over next 10 years of which $5-7 billion are targeted for the first year. The special economic zone will also have hospitals and other welfare projects.

What also significant is that global investors having a fresh look at investment potentials come from several countries and regions Foreign investors from the US, UK, UAE, Germany, Japan, China, Italy, South Korea, Australia, Turkey and Saudi Arabia are exploring avenues for investment in selected areas of their interest..They are looking at the infrastructure building, power generation and distribution, oil exploration, trade and finance, fertiliser, textiles, agriculture and food processing.

According to a report of the US State Department, America will invest through its infrastructure support programme $2 billion in agriculture sector between 2010 and 2014. South Korean Lotte Group is installing a $45 million 40MW power plant to meet electricity requirements of Lotte Pakistan PTA Ltd (which manufactures PTA—an essential raw material for textiles) and to sell surplus power to Karachi Electric Supply Company.

Last month General Electric signed an MoU with the federal government to develop energy sector. According to the terms of the MoU, GE will help the government achieve its long-term development goals in energy, transportation and water sectors.

A good thing about the renewed interest of foreign investors is that they are willing to provide innovation inputs like education, advance learning, awareness, motivation and trouble-shooting approach. This would trigger production of innovation outputs like skilled workforce, better technology and superior management models that would enhance productivity of key areas of the economy.

In February this year the IFC and the Aga Khan Foundation (Pakistan) signed an agreement to support growth of small and medium businesses through skill development programme.

Australian investors are interested in investing in the farm sector to help us boost per-hectare yield of wheat and reduce crop losses because of poor harvesting and storage. The average per-hectare yield of wheat is 2.72 tonnes against 4.7 tonnes in China and seven tonnes in the European countries. Similarly, an average 40 per cent of fruit and vegetables is lost due to obsolete harvesting techniques.

Some progress has also been made towards providing an enabling environment to foreign investors. A 250 acres Korangi Creek Industrial Park has just been launched. The National Industrial Parks Development Company is working on two such other parks—one in Karachi and the other at Lahore.

According to the latest survey of the Overseas Investors’ Chamber of Commerce and Industry, foreign investors are willing to invest, but 67 per cent respondents were found concerned about worsening law and order situation. Still, 90 per cent of the respondents do not want to curtail their businesses.

Putting in place a flawless legal framework to govern foreign investment is also very important. “We should have smooth yet strong laws backed by constitutional cover not only to lure foreign investors but also to monitor progress made in meeting their commitments,” said a former chairman of Board of Investment. He cited cases of foreign investment in Pakistan Telecommunication and KESC where commitments were not honoured.

More important, laws should be enacted and implemented in letter and spirit to ensure that foreign investment is not obtained and operated in a way that can potentially harm the interest of local population. “We seldom have a win-win agreement with foreign investors. Most of the time, we are so desperate to get foreign investment that we forget to keep the interest of our own people supreme,” remarked an member of the Federation of Pakistan Chambers of Commerce & Industry.

To press his point, he referred to the keenness with which Pakistan is trying to lease out large chunks of land to foreigners for cultivation of food crops. “This would certainly help foreign nations attain food security but leave the country vulnerable to future food crises.”

Finally, some businessmen argue that successive governments have failed to realise two very important points in attracting foreign investment. First, very little has been done to ensure transfer of technology and second, no solid steps have been taken to ensure that foreign-sponsored projects create enough jobs for the locals.

The Chinese investment in Gwadar port has taken care of local employment to some extent but there is a need to make this point an integral part of our national investment policy. “Moreover, we ought to focus more on inviting foreign investment for import substitution and in such areas where the ratio of profit repatriation is relatively low and a large part of foreign investors’ earnings are reinvested,” said a senior official of the State Bank. “If we ignore this point, we will continue to face balance of payments problems.”

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/outlook-for-foreign-direct-investment-230