This writer has been writing following in response to the news that the Government of Pakistan is considering disposing of LNG Terminal to Qatar. The decision is said to be aimed at bridging, albeit partially, the ever-growing foreign exchange gap. In this writer’s view, this development represents the lack of vision that Pakistan has been consistently showing with respect to the foreign investment both in terms of theory and practice.
This writer has spent 40 years in the largest accounting firm in the country that provided accounting, tax and advisory services to major businesses in Pakistan and multinational enterprises. At one time, almost over eighty percent of such investments were routed through that firm. In that process there were many learning experiences. Some of these are shared in the following paragraphs.
In Pakistan we have gone through two phases of foreign direct investment (FDI). In the first phase that began in the 1950s and ended in the 1970s the policies were better than those in the subsequent period or periods.
At that time, Pakistan was completely non-industrialised in almost all fields. Therefore, the government as a policy encouraged foreign direct investment. Nevertheless, even in that process, for basic industries like cotton, jute, carpets, etc., foreign investment was not encouraged and Pakistani industrialists were incentivised to make investment with adequate foreign currency provided by loans arranged through PICIC and IDBP, etc.
There were serious restrictions on 100 percent foreign ownership in consumer goods manufacturing. Foreign direct investment made at that time was mainly in pharmaceuticals, chemicals, etc. Even in the pharma sector it was the government’s policy to encourage foreign companies to transfer technology to Pakistan. The writer is a witness to two such projects.
One was the Glaxo factory in Lahore for the manufacture of infant milk products, the other was Wellcome’s plant in Karachi for tuberculosis medication. Unfortunately, we as a country have reversed the direction of this process. How ironic it is that both these plants are no longer operational.
It is true that foreign inward inflows during that period were not perfect but they were not as disastrous as those which were followed in the subsequent years. The most important feature of policies at that time was that such policies were framed keeping in view the industrial requirement of Pakistan, not the balancing of the current account. FDI was never a subject of the treasury; it was and is strictly a subject of economics and finance.
The other good feature of those investment policies was the savings in imports due to industrialization which adequately compensated the repayment of capital and dividend whenever required. It was due to this reason Pakistan never had cash flow crisis in foreign currency up to 1970.
The new gurus of FDI after the 1990s, who were essentially investment bankers and stock brokers, emerged and we coined the word ‘portfolio investment’ and considered it as FDI with a completely wrong policy of deregulation. We allowed 100% foreign ownership in the companies, making water and aerated beverages. Pakistan may be the only country in the world where aerated water bottling companies of the world famous names of Coke and Pepsi are 100% foreign-owned. The same is the case with mineral water, etc. During the period after 1990 till to-date one of the objects of attracting FDI was balancing our books in foreign currency.
We proudly stated that we attracted so much FDI without realising that dividends to be paid on such investment will be much more than the initial capital, draining the foreign exchange reserves forever. This position became abundantly clear by 2018 onwards when incoming FDI during the year was less than the amount to be paid as dividend. Now in 2023 we are not allowing remittance of dividend informally due to our foreign exchange cash crunch. A tragedy for the country and a lesson for MNCs (multinational companies).
Foreign investment to improve the management of the company or privatisation is to be encouraged and PTCL is an example. However, we all know that the amount of FDI in PTCL is still not accounted for and we are regularly paying dividends.
This is a long debate; however, in summary the fact is that whenever there is privatisation, the primary reason for it should not be the receipt of cash especially in foreign currency. Reference should be given to Pakistan investors or in the alternative a guarantee from the foreign investor be obtained that a certain portion of profit will not be remitted abroad and will be deployed in Pakistan.
In this situation it will be suicidal and disastrous for the future generation of Pakistanis if we decide to sell the shares of OGDCL or LNG Companies to foreigners. These are profitable entities. These units are to be listed on Pakistan Stock Exchange and repatriation of dividends be restricted in an appropriate manner. Pakistan has already mortgaged its future generations for the repayment of local and foreign debts; however, it is important to note that future avenues for business by the businessmen of this country should not be blocked by selling all good and profitable assets of the country to foreigners to overcome the cash flow crunch in foreign currency that has arisen on account of luxurious lifestyle of the elite of this country.
This writer has full confidence that future generations of Pakistan are capable enough to live honourably if a level playing field is provided. People in power at any time in Pakistan have no right to sell the family silver for the reason that they lost their fortune at the casino and they are not able to run this country.
The best course is to leave the ground free for new teams to come. There can never be a vacuum. There is a need for complete revamping of the Privatisation Commission and FDI policy in Pakistan. If the Pakistani policy makers do not understand one simple principle that FDI is not a cash flow subject then they will destroy the country.
Let that not happen. If required, judicial intervention will be undertaken to save the country. In India there is a case of Azadi Bachao Andolan reported as UOI v. Azadi Bachao Andolan (2003) 263 ITR 706/132 Taxman 373/184 CTR 450 (SC) by the Supreme Court of India where public interest on policy matters has been acknowledged. Time has come for similar action in Pakistan.
Copyright Business Recorder, 2023
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