Foreign direct investment has crept up in recent years but the increase has been slower than projected with international investors harbouring a whole range of concerns about doing business with Pakistan. The US Pakistan Business Council in Washington D.C, a group of major US investors, has been working with the Pakistan government in an effort to raise FDI. How do US investors, one of the largest in Pakistan, view the opportunities for investment? And what would they like to see change in government policy?
Dawn’s Naween A. Mangi spoke from New York to Ahmet Bozer, chairman of the US Pakistan Business Council.
IN 2004-05, foreign direct investment crossed the $1.5 billion level, up from $949 million in 2003-04. FDI from the U.S. rose from $238 million to $326 million in 2004-05, making American investment second in quantum only to funds from the UAE which poured $367.5 million.
Although in this past fiscal year, the government met the $1.5 billion target Islamabad had struggled with last year, FDI commitments still remain lower than expected given the improvements in macroeconomic indicators since 2001.
As one of Pakistan’s largest groups of investors, U.S.-based investors banded together in 2002 under the platform of the U.S.-Pakistan Business Council with a mandate to promote U.S.-origin FDI in Pakistan.
“We aim to create platforms where U.S. investors and potential investors have a change of dialogue with the Pakistan government,” Ahmet Bozer, chairman of the Council said in an interview to Dawn from his Istanbul office. “We play a bridge role and communicate the concerns of investors to the government in the hope of influencing policy making. It is very difficult to actually trigger specific investments but we believe that if this dialogue is sustained, people will become more aware of investment opportunities in Pakistan.”
The council has a total of 18 members including major companies like Bozer’s Coca cola which has invested $150 million in Pakistan, Pepsi, Citigroup, Motorolla, Merck, General Electric and Boeing. Smaller companies owned by entrepreneurs of Pakistani origin, such as Touchstone Corporation are also members of the council.
So far, Bozer said, the Council has been involved in awareness programmes aimed at increasing the visibility of Pakistan among investor circles. For example, the Council arranged for President Pervez Musharraf to address 300 investors in New York when he visited to address the UN General Assembly. Similar meetings were arranged in Washington and California and the Council also took two executive missions to Pakistan in March. “There were businesses worth a total of one trillion dollars in that mission,” Bozer said.
Perception of the economy: Bozer said U.S. investors perceive the improvements in Pakistan’s economy as significant and sustainable. “In my mind, Pakistan is a five-year old country,” he said. “Inflation has been fuelled by growth but the increase in exports, foreign exchange reserves and telecom investments all point to improvements.” He said the improved economic environment has led to greater activity across industry. Coca-cola, for example, he said, has grown 30 per cent and is investing $10 million to $15 million in Pakistan every year.
Bozer said investors have particularly noted the investor-friendly policy environment with easy access to government and a high level of understanding of business issues among top officials. “There are always minor issues on which we would like faster progress,” he said. Of major concern to investors are matters such as enforcement of intellectual property rights, certain taxation issues and efforts to improve Pakistan’s image, Bozer said. “For the soft drink industry, for example, taxation treats it as a luxury product similar to cigarettes which it is not,” he said. “We also need to see continued progress on good governance and improvements in infrastructure.”
Areas of interest: Bozer said U.S. investors have shown the most interest in the energy, construction and telecommunication sectors in Pakistan which are perceived as sectors with the highest potential for profitability. But he said other areas such as fast-moving consumer goods and the retail sector are also perceived as major opportunities.
“There are no international retailers in Pakistan so that could be a big area,” he said. He also said information technology could become a major sector if investments are made in the industry. His view is that trained human resources are a competitive advantage Pakistan has in this sector.
Although the privatization programme of the government has made progress, Bozer said the council perceives that improvements in governance and the rule of law are still possible. He said the Siemens Westinghouse case came under discussion in council meetings.
He also discussed the impact of perceived security threats in the country on the prospects of attracting U.S. investments. He said once executives travel to the country, the threat is minimized by experience. “Karachi has the same ranking of safety as New York City,” he said. “However that’s not to say it is not an issue. There is a travel advisory in place and U.S. companies can be “anxious about that.” He emphasized that this another reason why aggressive image improvement efforts are needed.
“In this area, substantial results have not been seen so we are trying to work with the government to see how this can be done. We are to present them with a plan in this regard.”
The council chairman said image concerns were a major agenda item discussed at the March meetings in Pakistan. The Council is currently working with a firm in Washington DC to prepare a plan for image improvement. Similarly, where the enforcement of intellectual property rights is concerned, Bozer said this is of critical importance to the pharmaceutical industry in particular. “The government is trying but there is room to go yet,” he said. “The effort is there but it is not sufficient.”
Bozer said the political environment is not of major concern to the members of the council. “It appears that the current economic environment functions very well in the current political environment,” he said. “Matters like deregulation and privatization are continuing and these are issues of significance to investors.”
Share market: As FDI inflows into the country have improved, foreign portfolio investment has also risen albeit at a slower pace even though the stock market has performed strongly. In 2004-05, foreign portfolio investment rose to $153 million from a net outflow of $28 million in 2003-04.
Of investments in 2004-05, U.S.-based portfolio investment amounted to $47 million, up from $21 million the previous year and higher than from any other country. Bozer said the council has not focused on portfolio investments but the general observations are that the market does not have enough depth or liquidity to attract U.S. investors. “That means people don’t want to take too long term a view,” he said. “They prefer to have more options. In Turkey, for example, the time frame for investment is not the way it is in London or New York.”
In conclusion, Bozer said the Council expects that the predictability and sustainability in the economy will continue. “If Pakistan can keep up this momentum for another four or five years, it will pass certain thresholds and then going back to difficult days which will be much more difficult. It is then that we will see a history-making story in place.”