KARACHI, April 13: Policy makers want corporates to raise funds from the capital market and reduce their dependence on banks so as to follow in the footsteps of industrialized countries.

The shift from bank loans to corporate bonds and equity market for project financing works to the advantage of companies with a track record. Those firms, which do not perform according to market expectations, find it difficult, or even impossible, to access the market for needed money.

Now, the corporates are expected to show improved financial performance. This would also help government to tax their incomes, some of which is generally believed to be hidden from the balance-sheet. As banks and financial institutions trade in corporate bonds/TFCs, they would not be over-burdened with non-performing loans.

So far so good. But what happens to the common investors in the bonds, stocks and shares? How would their interest be protected? Companies in developed markets care more about market perception about the value of their outfit rather than making real profits or accumulating assets. The Enron, Anderson and now Merrill Lynch fiasco have confirmed how image about company value has been created and people wrongly advised to invest in junk stocks.

Despite being the largest free market, United States does not accumulate enough capital to fund required investment. Its capital needs are met from a major share of global foreign investment that it attracts.

Dr Mahathir Bin Mohammad, the prime minister of Malaysia, hit the nail on the head, when he observed recently “Today, business is not about making real profit or accumulating assets but is about creating market perception of the value of companies. Share price is all important. It may not reflect the profitability or the real worth of the company...If the money invested would not yield any worthwhile profit it does not matter as long as the shares can be disposed at a higher price and capital gains made.”

In the United States, corporate profits have plummeted but stock prices have picked up because of the liquidity in the market.

The corporate world is also witnessing a wave of unending mergers and acquisitions, that is making companies enormous and dominating, which is preventing competition so vital for the growth of the free market. In a level playing field, the size of the contestants count.

To quote Mahathir, “the mergers and acquisition are leading to a situation, if not of monopoly, certainly oligopoly” — i.e. a situation in which there few sellers of a particular product or service and a small number of firms control the market.

Whereas, policy-makers in Pakistan have been criticizing what they call “crony capitalism”, the Malaysian prime minister defends the Japanese and Korean conglomerates set up with active support of their governments. He adds “they are big and present a formidable force against competitors. They are not monopolies. They are big but not overwhelmingly dominant.” These conglomerates have not been created by mergers and acquisitions which, it is feared, is leading towards the elimination of competition.

The scenario emerging in Pakistan is likely to follow the global trend towards oligopoly. Whether it be Pakistan State Oil, that dominates the domestic market or gas companies that are monopolies, these are to privatized. It is beyond the capacity of local investors to bid for the country’s corporate giants. It would naturally be sold to the foreigners. These acquisitions would help make foreign firms overwhelming dominant player in the domestic as well as global market unless for reasons of security, these go to the Arab investors.

On the one hand, the automobile market is too small for the number of assemblers-cum-manufacturing plants and surplus capacity that has been created. And on the other hand, it is low production, that is raising premium on the market car price. Ex-factory sale price goes into the balance-sheet. The premium does not.

Faced with an over supply situation and in order to remain profitable, the cement manufacturers have formed a cartel to safeguard their interest.

The main job of the cartel is to maintain demand-supply balance, says Taurus Securities, ensuring stable cement prices and a reasonable level of profitability for the manufacturers. The cartel does that by allocating each manufacturer a sales quota. The competition is eliminated. The country has a 16 million tons of cement capacity with the demand stagnant at around 9.9 million tons.

Similarly, the country’s 500 money changers provide a network for less than half a dozen major players who operate as a oligopoly.

The corporates are afflicted by frequent and unprecedented time cycles of boost and burst. To survive and grow, they have to become slim. They cannot afford a corporate umbrella for their employees. Social exclusion, rising unemployment and soaring poverty is preventing a rapid expansion of markets for goods and services. In many areas worldwide, there is surplus production capacity. Hence they are seeking profits from capital gains and oligopolies that help curb competition and investors in corporate giants often get a raw deal.