Dismal FDI – Where to invest?

Business Recorder (BR) Research

Amid continuous slide in exports, and a visible slowdown being seen in home remittances, there is no good news on the foreign direct investment front either. As per SBP’s numbers, FDI has posted a decline of over 53 percent during 2MFY17. In absolute terms, the decline in FDI for July-August 2016 was around $128 million. These figures are not positive for the country that is depending on Chinese investment increasingly. And a key feature of the net inflows this time around was that Chinese investments have also reduced to just $25 million compared to $135 million in the same period of the last fiscal year.

Which sector should an investor sit with a billion-dollar investment in? One reason for stagnant to declining FDI is lack of opportunity in sectors that would attract significant inflows from foreign investors. Two major sectors with potential for significant foreign direct investment in Pakistan are utilities and infrastructure – privatization process of which has been halted for the time being and thus holding back any opportunity for the investors.

In infrastructure, a key area for FDI can be the public private partnerships market structures. While the government has got the ball rolling for state funded infrastructure projects, there is a lack of public-private partnerships, which are a must for accelerated development of the sector. There are no structures and defined mechanisms for an investor willing to invest in mega infrastructure projects like bridges, roads, motorways, buildings etc.

Similarly, a big investor can easily enter the utility segment that offers immense opportunities like the recent interests developed for K-Electric. However, the privatization plan for the power and gas sector utilities has hit a snag, closing the opportunities for the foreign investment to pour into the sector. While the government has gone full throttle in pursuing CPEC projects, Shabbar Zaidi highlighted in one of the TV shows that there is a lack of substantial policy for opening up of avenues for foreign investment, which is the government’s job. It is worth worrying that even after concerted efforts, the FDI inflows from China have actually dropped in the first two months of FY17.

Though it is expected that in the coming years, the inflows from China will increase significantly, there is much more need for diversification – something that the column has picked up several times – by creating avenues, which could entice investors beyond China.

Published: September 23, 2016.