Home / Investments/Insurance / Privatization and its impact on investors

Privatization and its impact on investors

Published on 20th Oct, Edition 42, 2014

 

In June of this year, the foreign direct investment fell drastically over the past 6 years with economists seeing a weak forecast for future investments in Pakistan due to the increased security issues the country is being facing. The investments coming into the country come in the form of Greenfield investment. According to economists, due to the recent security concerns, foreign investors feel hesitant to either freeze or continue their investments in the country. With the condition of the country in terms of its political stability, the state of the economy and security concerns being amongst the most important contributing factors as to whether or not to invest in, Pakistan does not seem to be fairing well along these aspects.

Alongside such factors, the guarantee of profits from their investments, durability and transparency of the policies employed in the country and the credit rating also matter. However, Pakistan unfortunately seems to be lacking such factors, which would promote investment in the country according to the former governor of the State Bank of Pakistan. It is believed that in the upcoming future, apart from portfolio investment and privatization, it is unlikely that much FDI will come into the country. The importance of privatization in its role in bringing in FDI can be seen through the transaction of United Bank Limited, which was recently privatized for $387 million, suggesting that foreign interest is still present in the nation. This particular transaction was undertaken during the attacks on Karachi airport thus while foreign investors seem to be having a continued interest in acquiring stakes in the country, the law and order situation making the progress slow and not up to mark.

It is also believed by Muzzammil Aslam, head of the Emerging Economic Research, that Greenfield investment in the country could also be hampered if such security concerns continue and the political aspect of the country does not stabilize shortly as it could cause the confidence of the investors to be lowered. No foreign investment is likely to come into the country if there is a lack of security. While the government has managed to convince the Chinese to invest into the country’s infrastructure, it still remains to be seen whether or not this will materialize.

During fiscal years 2004 to 2007, the country experienced an increase in its foreign direct investment inflows as the nation was experiencing economic growth and political stability and was engaged in a privatization plan, which allowed such positive effects to show through. The main industries which were responsible during the time for making this happen was the telecommunication sector, mining, oil and gas exploration, financial businesses and petroleum refining industries.

Due to such factors, the government has been advised on revisiting its privatization policy to allow those public entities which are not producing any profit to be handed to foreign investors who can help the businesses earn profits once again. During the past 26 years, assets amounting to Rs476 billion have been privatized. In recent times, the Pakistan Telecommunication Company Ltd was sold for a value of Rs156.23 billion to Etisalat, however, the government has still not received the entire proceeds from this business transaction. The investors keep putting off the due payment for some reason or the other and have been doing so for the past six years. Similarly, Habib Bank Limited and Kot Adu Power Company too were handed over for Rs22.4 billion and Rs11 billion respectively.

 

According to the local industrialists and economists, it is believed that due to flaws in the privatization policies and transactions which occurred during the tenure of the previous governments, foreign direct investment has stopped coming in for green projects in the country.

With UBL was bought by foreign investors, a point to note would be that a local bank was at the time the highest bidder for the bank, however, the government at the time rejected bids put forward by the bank and went in favor for a non transparent privatization method. Similarly, the Sui Southern Gas Company and the Sui Northern Pipelines Limited did not need to be given over to foreign oil companies. Domestic consumers could have been handed these two companies through the use of better marketing, awareness and convincing amongst the local investors. Considering the amount of capital flowing out of the country in the past one-and-a-half decade shows that while the local investors do have the money to invest locally, they do not have confidence in the government. These investors continue to remain prone to blackmailing while foreign investors are fully protected.

The argument of foreign investors doing a better job at the companies they acquire in comparison to local investors is also not true. The performance of both are seen to be on equal terms with the examples of Allied Bank of Pakistan and MCB Bank seen to be great examples of banks which have been taken over by local investors.

While companies such as the Oil and Gas Development Company, Pakistan Petroleum Limited, and Pakistan State Oil Company Limited are part of those public sector companies allocated to be privatized, loss making companies such as the Pakistan Steel Mills and Pakistan International Airlines are being retained. This is primarily due to the share value of these state-owned companies being much higher than their low prices. Thus it is believed that privatizing these companies would be a mistake and they are better off being retained.

Thus, while privatization has proven to be a significant factor in bringing in foreign investment, it should be taken into consideration that local investors too have the potential of taking over companies and helping the economy progress. Law and order concerns and political instability affecting foreign investors affects local ones as well which is why assuring both parties would allow the country to gain investors from both aspects. This would further allow companies to do well and to be managed in a manner where they can generate profits to the value of their potential.

Check Also

Over 200 PHDs in a year

  Established in 1882 at Lahore, the University of the Punjab is now one of …

Enhancing GDP size

  Two of the common complaints are: 1) Pakistan’s GDP size is too small and …

Leave a Reply

Your email address will not be published. Required fields are marked *