Foreign firms reinvest earnings
WHILE the overall fresh foreign direct investment is falling, foreign firms operating in Pakistan with focus on long-term business potential are investing a large part of their earnings to gain a stronger foothold in the market. The amount of such reinvestment in FY09 and FY10 was in excess of $930 million, accounting for a little less than one fifth of fresh FDI inflows. Capital spending went into a wide range of businesses including oil and gas exploration, petroleum refining, financial business, trade, chemicals, consultancy services, and transportation.
"We are working on improving FDI inflows and are also trying to provide an enabling environment to foreign investors to continue to reinvest their earnings," said a senior official of the Board of Investment. He cited several things that encourage reinvestment of earnings.
These include ongoing deregulation of policies in several sectors of economy including oil and gas exploration and petroleum refining, successful transition from quasi-regulated to almost free market regime in banking and finance, continuing checks on anti-competition laws and practices, quick and handsome returns on investment, and availability of abundant and inexpensive labour force and raw materials. Officials of foreign companies recognise these incentives though they say much more should be done to lure new foreign investors and to persuade the existing ones to reinvest their earnings.
"That you have got abundant and inexpensive labour force is right," said a senior executive of a foreign-sponsored land developing and construction company. "But you have paid little attention to educate and train your people into the disciplines that are so much required these days," he hastened to add. He narrated how he spent months to find a health, safety and environment engineer only to hire a young environmental scientist instead and how he was trained on job.
Construction, telecom, cement and power generation are the areas where foreign investors made no, or negligible, reinvestment of their earnings in the last two fiscal years.
But they did so for varying reasons. "As for telecom, we had made millions in the years before and had also reinvested a large part of that in expanding our businesses here," said a senior executive of Mobilink. "So it was natural for some of us to hold or to scale down reinvestment for a while-especially when a cut-throat competition in a too-crowded market squeezed our margins and limited the scope for business expansion in the short-run."
Executives of foreign companies say they prefer to reinvest their earnings for several reasons. "One important factor is that most of your industries run below their capacity even at times when demand picks up.
This necessitates imports and makes sense for us to reinvest our earnings knowing that competition from local companies is too little. Besides, we know that such reinvestment would win us the economy of scales and guarantee us a constant edge over our local peers," said a senior official of a foreign-funded cement company.
Except for fertilisers, papers and boards, soda ash and motorcycles making, almost all industries in the club of largescale manufacturing including those of caustic soda, petroleum, food, metals, cars and light commercial vehicles and electronics have experienced a decline in capacity utilisation. Cement industry, however, witnessed an increase-up to 70.5 in FY10 from 65.5 per cent a year ago.
The World Investment Report released in July this year revealed that FDI fell 37 per cent to $1.114 trillion in 2009 more than double the decline of 16 per cent seen in 2008. The report said that recovery in FDI inflows had started but estimated that these inflows would only inch up to $1.2 trillion in 2010. "Pakistan being a neighbour of China and India (two giant economies that are also among largest recipients of FDI in the post-recession environment) stands a fair chance to attract enough FDI relative to its size of the economy," says a member of the managing committee of Overseas Investors Chamber of Commerce & Industry.
"It would make a sense for foreign investors investing in China and India to also explore potential investment avenues in Pakistan to keep it in the loop of their strategic chain (of production and marketing)," he remarked.
A decline in fresh FDI inflows in the last two fiscal years has increased the country's dependence on external borrowing. Overall FDI inflows during FY09 and FY10 (including reinvestment of $930 million) stood around $5.2 billion-a little below $5.4 billion FDI received in fiscal year of 2008 alone. "So, seeking fresh FDI is-and it should naturally be our top priority," said the BOI official. "But global FDI inflows are falling while advance economies like the US and the EU and Japan are spending hundreds of billions of dollars to stimulate economic growth. It is against this backdrop that developing countries fear liberal inflows of poor quality FDI. So we ought not to be too hasty," he added. Government officials and central bankers say several things determine the quality of FDI. These include whether the FDI is of long-term in nature and whether it can create job opportunities and come into the sectors where investment can benefit not only foreign investors but also the recipient country-and finally to what extent and under what timeline an FDI inflow would accelerate outward repatriation of funds and what would be its impact on import bills and on export earnings.