For­eign firms rein­vest earn­ings

The Pak Banker - - 4editorial - Mo­hi­ud­din Aazim

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.

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