Mistreatment of investors and Falling FDI

Pakistan’s economic landscape has been no exception to the impact of COVID-19. According to reports released by the State Bank of Pakistan, Foreign Direct Investment (FDI) fell by almost 30 per cent to USD 1.3 billion in the first eight months of the current fiscal year,  compared to USD 1.85 billion in the same period the last year. Additionally, foreign private investment inflows also registered a decline of 43 per cent in the same period.

However, these numbers also highlight a problem deeper than a global pandemic. Foreign Direct Investment is a key driver of the economy, and extends beyond just the inflow of capital from overseas. Global investment giants also lend their expertise and capability to improve the health of companies and enhance their competitiveness in the market. Declining investments place an additional strain on businesses operating in Pakistan, and deprive them of the human resources and knowledge necessary to catalyze their growth.

The country’s power sector is one area where the practical implications of this phenomenon are most apparent. In 2009, K-Electric became Pakistan’s first and only power company to be privatized. The principal investors – including Aljomaih Holdings, among Saudi Arabia’s largest business groups invested as much as USD 720 million-equity injection by the Aljomaih Group, which put the company on a path to recovery and eventually a successful turnaround. The post-privatization success also set a precedent by spurring plans for the privatization of other DISCOs. Unfortunately, these plans were unable to materialize, owing to a complex operating environment that hindered the progress instead of facilitating it.

The country has improved 28 points in the World Bank’s Ease of Doing Business Index – a global survey of 190 economies that highlights their readiness to accept new investments and business. While these numbers are inspiring, there is still ample room to improve the regulatory landscape to facilitate the entry of new businesses and encourage further foreign direct investment. 

Today, the sustainability of KE is under threat owing to the circular debt it is trapped in -Electric’s outstanding Tariff Differential Claims (TDC) have surpassed the Rs 275 billion mark, placing a tremendous strain on the financial value chain. These funds are crucial for the company to actualize its investment plans and secure the growth necessary to drive the provincial and national economy. The issue of mark-up on payables but no mark-up on receivables of KE is ample proof that investing in Pakistan is a one-sided affair. The current state of affairs shows that investors’ positive sentiments are not reciprocated in our country. Such news is not encouraging to overseas investors exploring Pakistan as a potential market, since they reflect a complex operating environment on part of the government and regulator.

K-Electric has been engaged in talks with the Federal Government to oversee a smooth and amicable resolution to the matter, and both parties have stated their determination towards the same. Where KE’s privatization established a way forward for the nation, the current situation can also be used as a learning exercise to identify regulatory and policy bottlenecks, and resolve them so that we can collectively cure the illness instead of treating the symptoms.

Recently, the MD of Aljomaih Holdings also visited Pakistan to conduct a series of meetings with government stakeholders including but not limited to the Prime Minister, Federal Minister for Power, Finance Minister, and the Governor of Sindh. All officials have vowed their support in expediting a solution to the roadblocks affecting the transaction, and we remain hopeful for a quick resolution.

The role of a regulator and the government should be to create robust policy frameworks that are conducive to the growth of business in the country. Despite these odds, Shanghai Electric Power Company has expressed a long-standing interest in acquiring the majority share in K-Electric. Shanghai Electric manages 3 times the generation capacity of K-Electric; its parent company, the State Power Investment Corporation, manages 5 times the generation capacity of Pakistan. Yet, for the past 5 years, the transaction has not been completed successfully, despite keen interest from both K-Electric and Shanghai Electric to do so. 

Resolving the Gordian knot of issues surrounding the sale of K-Electric to Shanghai can be a watershed moment in the country’s financial landscape, sending a clear message to all overseas giants that our market is ready for the next phase of development. In the absence of these opportunities, the country will buckle under the growing financial strain and lack of experienced, worldly resources. There needs to be a concerted effort to attract and secure foreign investment and expertise, and this can only be achieved using our existing scenarios as case studies for learning, lest we repeat the same mistakes again.

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