Pakistan's latent investment potential
QUETTA - Despite the country's weakened reputation with foreign companies as a result of continued political uncertainty and a perceived threat from Islamic extremism, Pakistan's economy has latent potential and has begun to reward foreign investors brave enough to enter.
Recent growth numbers have been strong, and Pakistan offers a strategic location and the incentive of high profitability. Given that government incentives to investors include a provision, rare internationally, to allow 100% equity, it becomes less surprising that official sources mention 700 foreign companies alreadyoperating in Pakistan and making double-digit returns. Recent encouraging signs in manufacturing and IT outsourcing have further strengthened Pakistan's case.
Industries which offer promising opportunities for investment include telecom, IT, agricultural industries, engineering, construction, power, oil and gas exploration, fisheries and food processing.
Pakistan's total labor force is estimated at about 46 million, and the hourly wage rate further boosts the country's competitiveness, as it is only 37 US cents, lower than India (58 cents) and China (67 cents). Investor confidence in the Pakistani economy has been helped by continuity in government policies over the years. Signs of this confidence include the oversubscription of euro and Islamic bonds in the international market.
Pakistan's major sources of foreign direct investment (FDI) have been the United States, the United Kingdom, the United Arab Emirates and Japan. The principal sectors attracting FDI thus far are financial services, oil and gas exploration, power, trade, transport, storage and communications, chemicals, pharmaceuticals and fertilizers and textiles.
The American Business Council of Pakistan recently estimated total US investment in Pakistan at roughly $1 billion. In FY2004, major US investments were concentrated in oil and gas exploration; textiles; storage, transport and communications; trade; and construction.
Pakistan's manufacturing sector has been growing at more than 15% a year. The growth in large-scale manufacturing (LSM) picked up in the 2003 fiscal year and contributed more than one-fifth of GDP growth. LSM production increased by 14.7% in the first seven months of FY2005, compared with a 15.1% increase in the same period of FY2004.
The robust growth, led by sugar, automobiles, electronics and cement, was attributed to a strong recovery in investment in the sector and continuing high demand. A sharp increase in the flow of credit to the private sector in the first nine months of the current year indicates that the high growth of the manufacturing sector is broad-based and sustainable.
Vehicles are a notable bright spot; Pakistan has witnessed a rapid growth in domestic automobile manufacturing over the past five years. Major automakers such as BMW, Toyota and Honda have invested in manufacturing facilities in the country; Honda has also built two motorcycle factories. In FY 2002-03, real growth in manufacturing was 7.7%. In the 12 months ending June 30, 2004, large-scale manufacturing grew by more than 18% compared to the previous 12-month period.
Another industrial investor was Drillcorer Ltd, a British firm, which moved production of its drills to Pakistan, enabling the company to charge 15,000 pounds sterling(US$26,186) rather than the 65,000 pounds that would be required if they were produced in Britain.
Overall, the growth in industrial output, including the private sector, has accelerated. With present government policies aiming to diversify the industrial base and bolster export industries, Pakistan could yet become a manufacturing hub for Western companies interested in exporting goods to the region.
Owing to a combination of favorable economic circumstances, Pakistan has been identified by major global IT corporations as a new offshore investment destination.
An indication of this was a meeting between Pakistan President General Pervez Musharraf and Microsoft chairman Bill Gates on the sidelines of the World Economic Forum in January. Musharraf noted that the effective use of IT was fundamental to Pakistan achieving its strategic economic objectives. "With its large domestic market and strategic location, Pakistan could be used as a hub for Microsoft initiatives in Central Asia and Afghanistan," the president said. For his part, Gates discussed possible areas of Microsoft-Pakistan collaboration and investment in the country's promising IT sector.
With an export target of $72 million set for FY 2005-2006, Pakistan is currently working hard to catch up with its giant neighbor in software development and business process outsourcing. Fifty-five foreign IT and telecom companies have already entered the market. In Pakistan's favor is a tax-free policy for IT industries; India's high attrition rates and recent decision to tax the software sector have forced many overseas firms to look at other options.
One IT success story is Tech Logix Pakistan Pvt Ltd, one of Pakistan's first few software exporters, which gets 95% of its business from US customers. The company had $8.2 million in revenues in 2004. It brings in business through a front office in Boston while back-office development is done by 90 software developers in Pakistan. The company counts General Electric and Massachusetts Mutual Life Insurance Company in the US as its biggest clients.
The country is considered as an attractive venue to set up service centers. In 2004, a global consulting center for NCR Corporation was established in Islamabad to provide services to clients all over the world. Canadian telecommunications equipment manufacturer Nortel is also planning to set up a software development center in Islamabad.
Some recent high-profile investments have occurred in the communications sector. One of these was a February agreement between Infosat Communications of Canada, a Bell Canada Enterprises (BCE) subsidiary, and Comstar ISA Ltd, the leading satellite service provider in Pakistan, to install and operate the first Broadband Satellite Hub in the country, which will provide broadband, 18Mbps megabits per second Internet and other services to subscribers around the country. The initial investment from Infosat will be gradually increased, company officials said.
In remarks on the deal, Canadian High Commissioner to Pakistan David B Collins acknowledged that Pakistan was a very good destination for investors and said Canadian businessmen would soon be visiting Pakistan to explore opportunities.
Infosat senior management visited Pakistan in 2005; the general manager of Infosat said that Pakistan had been selected as the next Infosat destination because of its market potential, technology awareness and the current investor-friendly environment. The agreement reflected growing investor confidence in Pakistan as a viable market for value added communications services.
In Barcelona, Spain on February 13, Pakistan received a "Government Leadership Award 2006" for its exceptional development and progress in the field of mobile telecommunications from the Global System for Mobile Communications Association (GSMA).
Pakistan was the second country after Brazil to receive this honor, which recognized the nation's rapid progress in mobile telephony; the number of mobile subscribers in the country has increased from 2 million to 20 million in the last five years alone.
Rob Conway, CEO and board member of the GSM Association, remarked at the association meeting, "The GSMA is delighted to recognize Pakistan for its work in mobile communications. In a short period of time, the government has established a strong and clear policy framework and a stable regulatory environment. Its deregulation policy has been successful in stimulating growth in the mobile sector and, most importantly, bringing mobile phones within the reach of ordinary people of Pakistan."
The government is expecting a further increase of 50 million subscribers in the next three to four years with associated investments of between $3 billion and $4 billion, presenting an additional opportunity for telecom investors.
Pakistan established its first Export Processing Zone (EPZ) in Karachi in 1989, with special fiscal and institutional incentives available to encourage the establishment of exclusively export-oriented industries.
The government subsequently established additional EPZs in Risalpur, Gujranwala and Sialkot in the Punjab, and Saindak and Duddar in Balochistan. Principal government incentives for EPZ investors include an exemption from all federal, provincial and municipal taxes for production dedicated to exports; exemption from all taxes and duties on equipment, machinery and materials (including components, spare parts and packing material); indefinite loss carry forwards; and access to Export Processing Zone Authority "One Window" services, including facilitated issuance of import permits and export authorizations.
Pakistan also offers incentives for additional categories of export manufacturing. An Export-Oriented Unit (EOU) is a stand-alone industrial unit, allowed to operate anywhere in the country, that exports 100% of its production. EOU incentives include an exemption from duty and taxes on imported machinery and raw materials and duty-free import of two vehicles per project. Pakistan also has 83 industrial zones (IZs): 27 in Punjab, 29 in Sindh, 16 in the Northwest Frontier Province and 11 in Balochistan. The IZs provide infrastructure facilities but do not enjoy fiscal incentives like those of EPZs.
The EPZs and IZs have produced results: the country witnessed 45% growth in exports during FY2002-2003, according to State Bank of Pakistan transaction statistics.
Asia Times Online