Yesterday’s piece on FDI in Pakistan showed that unlike the Chinese players, who are mostly concentrating on power and construction sectors, players from other investing countries have historically taken stakes in a wider sectoral basket. But that’s only one half of the story.
The other half is that many of the previously opened sectors – such as banking and telecom – are faced with near to medium term saturation, whereas other sectors do not offer great pricing – such as pharmaceuticals.
Take the case of telecom for instance. Falling FDI in the sector signals that the industry is nearing saturation following the rolling out of 3G/4G network. The slowing growth is visible in mobile broadband subscriptions, and industry revenues. The next trigger - 5G - cannot be expected in the foreseeable future since the technology is yet to become commercially viable in markets such as Pakistan. (For details, see BR Research On falling telecom investments, February 8, 2018)
Similar sector-level reasons are responsible for the falling FDI in financial and oil & gas exploration. The former statured in the years leading up to the Great Financial Crisis of 2007-08, and hasn’t recovered fully since then. The latter suffers from low crude oil prices that have hindered investment flows globally. But common to both these sectors is the likely rise of China. (For details on oil and gas FDI, see E&P sector foreign investment – lukewarm, March 13, 2018)
In the financial business sector, Chinese investments are expected to grow as Bank of China and the ICBC expands their respective operations in tandem with the expansion in CPEC. A few Chinese capital market brokerage houses may also be on the cards; recall that the Chinese have already bought the management control of the Pakistan Stock Exchange.
A similar theme may be in the offing in the case of oil & gas exploration. Recall that the United Energy Group had purchased British Petroleum’s assets in Pakistan in 2011.
And now in recent news, Dragon Prime Hong Kong Limited, a subsidiary of United Energy, has purchased OMV’s upstream assets in Pakistan.
Following the Malaysian firm that purchased telecom towers from Jazz, it should not come as a surprise if Chinese players also enter Pakistan’s telecom tower market. Regardless, however, the scope of these sectors may still be limited given the sector specific factors such as saturation or lack of right incentives.
Pakistan needs to be open to new sectors, many of which lie in the provincial domain, by putting both the right policies and the governance machinery in place. Kicking off growth in sectors like mines and minerals, aviation, packaged foods, and housing will be the new boon for Pakistan’s economy. That plus the completion of the pending privatisation agenda - in insurance, airline, railways, and power discos – can be the next triggers of FDI in the country.
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