IT is very pleasing for a country to receive large foreign direct investment (FDI), but painful to see the large outflow of its profits in foreign exchange. And that is all the more so when an economy like Pakistan faces a major balance of payments crisis mainly on account of a much larger trade deficit.

That $102 million went out in the financial year 2006 as remittance of profits from four privatized enterprises has upset some economic monitors. The remittance from Habib Bank, UBL, PTCL in the current year is estimated at $110 million and in the following year at $119 million.

This is before the privatisation of the big enterprises like PSO, Sui Southern, and Sui Northern and before KESC, 70 per cent of the shares of which have been sold before making any profits.

Similarly, Pakistan Steel will not be able to make the real profits for a few years. If PSO and the two gas companies are bought by foreign investors, the remittances of their profit would jump in a big way. That also depends on the number of shares of each company sold before their management transfer.

The biggest outflow of profits can be from PTCL of which only 26 per cent of the shares have been sold and yet its profits can be $66.3 million in 2006, more than half the remittances of the four companies.

Foreign investors find Pakistan attractive as they are allowed to invest in any sector and bid for any privatised enterprise. They can own hundred per cent of the capital or have foreign and local partners. There is no limit to the profit they can make. They can repatriate hundred per cent of the capital anytime and remit their total profits to their head office regularly.

Pakistan was hoping for large foreign companies with modern technology to come in to participate in the privatisation and expand such units. Even those who participated in the privatisation did not raise their stakes and win in the contest. Some found the prices too high; some did not find the political environment too congenial so they did not seek to win the race all out.

Compared to them, the Gulf investors faired much better and they found the environment more congenial to them than in the West which required larger capital than they wanted to risk.

In the current international climate, the source of their capital and its movements are likely to be looked into in detail and they did not want to expose themselves to such practices or relish such restrictions. They prefer Pakistan where small capital seems relatively big and where they have great pull with the government and better social acceptance along with special privileges.

So, they have invested in a number of small and medium sized banks and are expecting to expand them steadily. Meanwhile, the State Bank announced its policy to encourage larger banks with adequate capital and small banks to merge. The banks are actually moving in that direction following Basel II which the State Bank wants to implement in Pakistan.

Of the four units privatised which made $102 million as profits, the PTCL’s share was $66.3 million or more than half the groups’ profits. Habib Bank which was bought by the Aga Khan foundation made $11.93 million in 2006.

The UBL bought by the Gulf ruling group, made a profit around Rs924 million or $15.4 million in 2006. In the current year, it is estimated to make a profit of Rs1188 million and next year Rs1452 million.

The fifth unit taken over, the KESC is not making any profit and is not likely to make any next year as well. And the future of the privatised and aborted Pakistan Steel mills is in the doldrums, which colors the future of the other major enterprises to be privatised.

Multinational companies as well as domestic enterprises are making very large profits and announcing much of them as dividends. In the case of multinational companies such profits are repatriated. The best examples of such exceedingly profitable companies are the Unilever and Shell Pakistan.

Such repatriation of large profits at this stage creates a serious current account problem. And that is because of the peak price of oil which has touched $78 a barrel. Pakistan’s balance of payments problem will be a large one for some years, although it has hopefully or too optimistically set the goal of $40 billion exports five years. The current year’s target of $18.6 billion.

It is easy to set high targets after earlier fixing a target of $25 billion within three years. We had failed to reach the target of dollars $17 billion last year and could make $16.5 billion which left us with a large trade deficit of over $12 billion.

The service payments deficit at over three billion dollars is already too heavy. The shipping bill is a very heavy one and that will expand further as exports and imports increase. A study by the State Bank of Pakistan shows that the large current account deficits in the 1990s were the result of a heavy trade deficit. The same holds good today.

Pakistan cannot check remittance of profits of the foreign companies however large. And any curb on remitting profits will also discourage the FDIs including in the oil and gas sector where we need investment desperately.

In such circumstances Pakistani entrepreneurs can form syndicates to bid for the large enterprises to be privatised and make the process a success. Unfortunately, too many of them prefer to own the majority of the shares of their companies and control them entirely. They do not believe in true corporate culture. They prefer to borrow from banks, set up companies and later raise more money through term finance certificates, to selling shares through IPO’s. All that has to change in favour of an open market corporate pattern.