SIFC must prioritise private sector

KARACHI:

Privatisation and foreign investment seem to be a high priority for the transition government. And in this context it has recently amended the Board of Investment Ordinance of 2001. This amendment sets up a Special Investment Facilitation Council (SIFC).

The SIFC’s mandate is to facilitate foreign investment and privatisation of GOP owned companies. And this is where the amendment makes its first mistake. Privatisation and attracting foreign investment are two fundamentally different processes which should not be delegated to a single body.

Privatisation involves a careful strategic review of GOP owned companies from multiple angles: market factors, competition, organisation, governance, financial resources and business strategy. Once this is done an investigation needs to be carried out about what if any structural, organisational, governance, marketing and financial changes need to be made to return a sick company to health.

If it is determined, pursuant to such a review, that returning the company to health is not feasible, a decision to privatise can be made. And once this decision is made, the GOP should recruit a specialist firm from the private sector to conduct the process so as to maximise the value to the GOP of the sale.

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Attracting foreign investment is a different ball game all together. It cannot be based on a “shot gun” approach which issues a general invitation to anyone who wishes to invest in any sector. It calls for the development of a focused strategic plan which specifically identifies, among other things, the fields in which investment should be made and even the investors who should be approached directly with invitations to invest.

The approach outlined in the SPIF document is general in nature and lacks focus therefore it is not likely to yield any useful results. A successful approach to encouraging investment will include the following elements:

Before anyone is approached to invest, the GOP must develop an industrial strategy. This should identify the industries which are critical to the nation’s development and economic plans. For example, Pakistan has a huge unemployment problem with millions of unemployed youth. So, it would make sense that any foreign investment be directed to sectors that generate substantial employment.

Thus setting up a refinery, for example, or other capital intensive process industries will not generate any significant employment since these plants tend to be largely automated. So, notwithstanding any strategic or security interests, such projects should not be prioritised.

Any foreign investment should be based on there being some kind of competitive advantage for the investor to set up in Pakistan. This could be, for example: Access to locally available raw materials – especially agriculture or mineral based raw materials, logistical advantages such as proximity to regional markets, and/or convenient and cost-effective transport links to these markets and the existence of local potential demand for their products.

Just as Pakistan suffers from serious unemployment, we suffer from a chronic trade deficit and the debilitating impact this has on foreign exchange reserves. This suggests prioritisation of industries that either generate significant new exports or are involved in the manufacturing of goods that are currently imported.

The next step, once potential industries have been identified, is to develop detailed feasibility studies which include the level of foreign investment required, cost of plant and equipment, cost of fabrication and erection, a marketing study, working capital and debt requirements and a plan to finance these and finally the expected ROI to the investor.

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Such studies would need to be prepared by professional firms who have the necessary expertise. And once these studies are ready meetings can be arranged with specific foreign investors presenting to them the study or studies that pertain to their area of interest.

There must also be a realisation that not all foreign investment is beneficial. Some foreign investments result in “milking” our foreign reserves while adding little or nothing to our overall strategic goals. Two prominent examples come to mind:

A global food producer acquired a leading local milk and dairy products producer in Pakistan. This acquisition added no value to our strategic goals. The local producer was serving the domestic market. Hence investment by the global food producer generated no exports. All that happened was that local sales and profits were boosted. And as a result, these profits, which hitherto remained in Pakistan, were remitted back to the foreign investor resulting in a net drain of foreign exchange.

In the second example, a large foreign white goods producer acquired one of Pakistan’s largest white goods producers. The same scenario was repeated as in the case of the milk company: Profits that were previously retained in Pakistan started to be remitted in foreign exchange back to the investor. Smart industrial policy would have required our local producer of white goods to continue to develop indigenous technology and grow its business with the objective of eventually becoming an exporter of its products.

Both of the above investments were ill advised from Pakistan’s point of view and not in line with foreign investment objectives. And both, while they resulted in a significant initial inflow of funds, will in the long-term result in a continuous net outflow of foreign exchange.

The SIFC amendment is sparce on details of how the council will be organised. If the intention is to make it just another department of government, then it is better to do nothing at all. For the SIFC to be effective it must be set up as an Independent Government Organisation (IGO) that should have its own chairperson, board and budget. It should report directly to the prime minster without any government intermediary.

Finally, and perhaps most critically, no officer of the Pakistan Administration Services should be even remotely involved with the SIFC. This is not to fault or question the commitment or competence of PAS officers. Their training and background have simply not prepared them to be corporate leaders. Many of them would have difficulty telling a balance sheet from an income statement.

There are many in the private sector who believe that the inclusion of PAS officers on the boards of GOP owned companies is the reason for the decline and collapse of many of these companies. Including them anywhere in the SIFC framework would be tantamount to sabotaging the organisation even before it starts its work.

So, the people who should be appointed to SIFC must be exclusively from the private sector selected from the ranks of leading CEOs, CFOs, business and financial consultants, university professors in the disciplines of economics, marketing, and finance.

The choice is stark. Bring in the best and brightest people from the private sector to run SIFC if the objective is to get results. But if the objective is to be perceived to be doing something, then by all means hand it over to the PAS. They may work furiously. But like a cyclist on a stationary bike, they and the SIFC will go nowhere.

The Writer is Chairman of Mustaqbil Pakistan. He holds an MBA from Harvard Business School and an engineering degree from M.I.T.

 

Published in The Express Tribune, November 6^th, 2023.

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