Joint ventures and new trend of working together

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Observer Report

While there is a strong national focus on the declining direct foreign investment, not much attention is being paid to changing trends and the quality of capital inflows that could help businesses become sustainable and the domestic economy, globally competitive.
There is a surge in foreigners’ interest, and growing investment, in brown rather than Greenfield projects and, no less important, the acquisition of partial/majority stakes by foreign firms in planned or running domestic private enterprises.
New local companies registered in August with the Securities Commission of Pakistan that showed foreign stakes, numbered 42 against seven foreign companies. Joint ventures are preferred to setting up new ventures as they pose less hassle and local partners have the expertise to tackle country specific business issues. From the local business perspective, many need foreign investment to upgrade technology and improve management methodology and work culture in order to add value to their products. Joint ventures in the auto sector are a success story. The repatriations of profits and dividends for the industry as a whole doubled last year.
Aware of this upcoming trend, the government is making policy changes. Finance Minister Ishaq Dar says the Companies Ordinance 2016, now tabled in the National Assembly, will facilitate joint ventures in order to attract foreign investment. The Ordinance eliminates the role of high courts in the merger/amalgamation of companies while empowering the SECP to approve such proposals. During Musharraf’s regime, fiscal incentives were provided to encourage the merger of weak banks with strong ones.
While encouraging joint ventures, the government needs to also ensure that they lead to the transfer of the latest technologies into the country. With domestic demand going up, no less than 39.1pc of the net FDI was financed by foreign firms operating in Pakistan from retained earnings which, according to the State Bank, surged to $744m in FY2016.
The net inflow of FDI depends on the nature of a deal. The sale of K-Electric — a deal between Dubai-based and Shanghai based companies — the acquisition of Dawlance by a Turkish firm, the sale of substantial or majority shares of E-Foods or Chevron’s Pakistan operations’ acquisition through a joint venture by Total Parco Pakistan in July 2015; would have different impacts on capital flows
The ‘net’ level of FDI is very low—less than one per cent of the GDP— as the State Bank’s annual report 2015-16 points out, but the net figure does capture the surging mobility of capital (invested in fixed assets) in the domestic market, keeping with the international trend. The management/ownership of businesses now changes hands with unprecedented speed. Pakistan is thus more exposed to international markets. These investments broadly fall in the category of national industrial consolidation required for sustainable businesses.
It is therefore important to see how foreign investment is helping the national economy to stand on its own feet and reduce excessive dependence on external debt. With the UK and US looking inwards and many countries focusing on their domestic economy, there is a call to encourage foreign investment in priority areas. But policymakers often tend to look at the volume of net FDI inflows from the perspective of balance of payments support rather than sound, balanced economic development .The outcome is: repatriation of profits and dividends by foreign companies exceed net FDI inflows. This means a shift towards an import-oriented economy. Multinationals in Pakistan do not have any worthwhile role in exports.
While looking at the FDI volume it should not be forgotten that IT ventures, where many new local and foreign companies are being set up, do not require as much capital as in traditional industries, But they improve efficiency and productivity. There are many positive factors which are likely to stimulate foreign investment: economic growth, the government’s decision to curb real estate speculative activity that may divert some excess money in the market towards productive pursuits; the government’s Doing Business Strategy 2016 which according to the SBP, ‘is in the process of implementation.’; the improved security and energy supply situation; and that lending financial institutions are also projecting a positive image of Pakistan’s economic performance.
To quote the SBP’s annual report, FDI inflows last year were ‘a function of both international developments and country-specific factors’ but ‘positive developments on the domestic front could serve as a major pull-factor’. The repatriation of profits and dividends on existing FDI in the last fiscal year amounted to $1.5bn with the figure going up to $38bn if oil and mineral proceeds were included.
The State Bank says, this reflects ‘strong profitability’. A big majority— 26 out of the 36 sectors— showed higher repatriation. That also explains the foreigner’s growing interest in joint ventures.