MANY foreign investors and lenders would like to establish and maintain cordial business relations with Pakistan, seen as a large, strategically located country with huge potential of economic growth.

Yet Pakistan’s mega infrastructure projects, including power hydropower generation, are receiving a lukewarm response from international investors.

In fact, net foreign direct investment inflows fell to $244 million during July-October, 2012 compared with $323 million in the corresponding period last year, down by 24 per cent. The matter needs to be investigated to establish why foreign investors are reluctant to invest.

Perhaps, more perceived negative signals are going out to investors than the positive ones. Important developments relating to investment projects being aired in the electronic media possibly ignore the real reasons. Such news reports generally connote negative perceptions attributing the fault to the concerned developing country or its functionaries.

Some of the topics under discussion these days are briefly mentioned here and need to be clarified:

a) Possible release of Turkish Karkay Power Ship a few days ago created ripples in various circles while the matter is under consideration in the courts. On March 30, 2012, the courts had declared the Rental Power Project deals (RPPS) as illegal and ordered that advances made by the government to RPPs may be recovered with interest.

b) Australian sheep were imported into Pakistan a few months back. Reports from local clinical laboratories declared that the sheep were suffering from disease and on that basis culling had commenced. Later reports from foreign laboratories declared the animals healthy. All the sheep were eventually culled. The Australian Government has asked for an enquiry.

c) The Karachi Metropolitan Corporation (KMC) and a Malaysian company IM Technologies are trying to reach a solution on the 47-storey IT tower project which was to be built adjacent to the Civic Centre in Karachi.

According to press reports, in case there is no amicable solution, the matter may be referred to a Singapore-based arbitration body.

d) The case of leasing of gold and copper mines in Reqo Dik, district Chagai, Balochistan is before the courts in Pakistan. Foreign investors have also approached the International Centre for Settlement of Investment Disputes.

These examples are only a sample of the cases of negative publicity for the country. There may surely be many other reasons why investors and lenders are not enthusiastic about Pakistan. Based on past experience, a review of the likely approach to foreign investment is attempted here to clear the mist to some extent.

Private investors are shy of risks which they find difficult to manage. They do not go to developing countries which are even temporarily being avoided by international lenders like the World Bank and the Asian Development Bank. Bilateral aid / development agencies also review political considerations before making any financing decision.

Foreign investors prefer to come together in a group with international lenders and / or other investors in the targeted project or programme offered by a developing country for financing. Loans may be classified as senior, subordinate or mezzanine. Besides, there are guarantees and credit enhancement facilities.

Different investors offer to take a slice of the funding requirement under strict contractual arrangements that are inter-linked. The approach offers better security to the lenders and investors. No country disturbs the agreed contracts against such formidable arrangements.

Quite often, banks and other financial institutions operating in the country offer loans to their depositors up to 80-90 per cent of the deposited amount. This depicts the mindset of the lenders who generally prefer to lend to those who do not really need borrowed funds. When it comes to the developing countries like Pakistan, matters such as ability to repay loans with interest on time, credits already availed and the past debt servicing record thereof are also assessed.

An idea of the country’s current debt position may be depicted by the following:

* The total debt and liabilities are said to be about Rs14 trillion and nearing the upper limits of 60 per cent of GDP under the Fiscal Responsibility and Debt Limitation Act, 2005;

* The local banks have reached near their lending limits to power sector prescribed by the State Bank;

* Current circular debt is about Rs400 billion, and is rising without any sustained long term solution. Many discos are showing losses. Existing IPPs experiencing liquidity crunch even sought help from the courts in the past. Sovereign risks are deterring foreign investment.

Borrowers, lenders and investors put their arrangements in the form of agreements and contracts. Investors are very good at that and can hire the best brains to safeguard their interest. Matters having bearing on the project are deeply researched and made a part of the contractual arrangements. Conditionalities and safeguards are inserted in the agreements. In such matters, developing countries, Pakistan included, are unable to fully match the level of investors’ expertise.

Borrowers in developing countries are sometimes found complaining that the investment agreements were one-sided. There may be various reasons for this. More often in the developing countries, the loan negotiation aspect is not given the attention it deserves. Foreign training on the subject, though rare and costly, is essential to safeguard one’s interest. However, foreign training is taken as merely an opportunity to visit the developed countries at public expense. Often, unrelated officers are nominated for such training. And whatever expertise is developed is not utilised properly.

In developing countries, loan conditionalities and other provisions for compliance are ignored by operational level government functionaries or the power utilities. Over time, such cases of negligence accumulate into a formidable heap of non-compliance. The senior management of the investee country becomes aware of the problem only at the fag end by which time a lot of damage has already been done. Claims and counter-claims fly and false egos play a part in further deteriorating a bad situation. The results are in the form of litigation or arbitration at the international level. These activities are costly and, whatever the final result, have negative publicity for the developing country.

Investors / lenders regularly screen media reports and exchange information with their embassies and the international financial institutions.

News reports help form an investor’s opinion about the investee country and its institutions such as: * Top level government appointments and decisions by such persons in procurement and award of contracts; big purchase contracts being awarded by the public sector enterprises and Discos;

* Law and order problem, irregular supply of electricity and rising cost of doing business;

* Imminent national events such as holding of general elections, and also the strained relations among various pillars of the state;

* Reported cases involving corruption / accountability;

* Performance of DFIs / banks;

* Capability and capacity of the project implementation entities at the federal and provincial government level; inter-provincial issues for hydropower projects; provincial governments capacity to prepare proper roadmaps for development; performance of various regulators; governance in institutions and the culture of ‘quick fixes’;

* Focus on overall energy mix and long term energy policy.

* Process of land acquisition for projects.