New entrant policy: Yamaha deal likely to bring new investment fervour

The project envisages building and selling global models of Yamaha motorcycles which have never been built in Pakistan before, enabling the country to come at par with the rest of the world. DESIGN: CREATIVE COMMON

KARACHI: 

Despite stiff opposition from existing automobile companies, the decision of the government to facilitate Yamaha as a new applicant and finally signing a New Entrant Agreement (NEA) with the Japanese company, is undoubtedly a giant leap towards giving a new impetus to Direct Foreign Investment (FDI) in Pakistan.

The decision of Yamaha to establish its plant in Pakistan will encourage other famous brands to invest in different sectors of the economy as under this policy the country offers more lucrative business opportunities to newcomers than those offered by regional countries.

It may be mentioned here that it took about four years for Yamaha to win this deal. In fact, the automobile industry was against extending this facility to Yamaha, because according to them facilitating a particular company by distorting the tax structure would undermine the principles of free market and go against the spirit of competition. They pointed out that unrestricted import of 100 per cent Completely Knocked Down (CKD) parts would result in the closure of vending industry and as such the new entrant policy would ultimately dent the tax revenue stream.

The new entrant policy allows import of 100 per cent CKD parts at highly concessional rates. The existing customs duty on import of CKD parts is 32.5 per cent whereas the ministry has offered an attractive incentives package for the new entrants for first three years – 5 per cent duty in the first year, 10 per cent in the second and 20 per cent in the third year.

During the first three years, the new investors would be required to achieve localisation/deletion to the extent of 50 per cent by value. At the end of this period, the new entrants shall be allowed import of non-localised parts at the prescribed rates, ie, 32.5 per cent of customs duty for a further period of two years. Thereafter, the new entrants would be required to match the levels achieved by the existing players.

The Yamaha contract can be termed a milestone in achieving the investment target, because according to the Board of Investment (BoI) statistics, in the latest financial year ending June 30, 2012, FDI plunged to $813 million. Economists describe this situation as alarming.

The figures compiled by BoI show that in the latest seven-month period (July-Jan 2012-13), FDI in Pakistan amounted to $525 million with the biggest chunk going in the foreigners’ all-time favorite oil and gas exploration and production sector ($327m), followed by financial sector and transport and construction. Fast Moving Consumer Goods (FMCG) is another sector of choice for foreign inflows. The growing number of multinational food franchises proves the point. Inflows from US, UK, Switzerland, Hong Kong and Italy have been in the lead.

As Yamaha Japan gets ready to bring in $150 million Foreign Direct Investment (FDI) for setting up a motorcycle manufacturing plant on a 50-acre plot at state-of-the-art, first of its kind Bin Qasim Industrial Park (BQIP), Karachi regains the status of one of the most attractive places for investment in the region. BQIP is being developed in an area of 930 acres by National Industrial Parks Development & Management Company (NIP), a subsidiary of Pakistan Industrial Development Corporation (PIDC).

The proposed investment is expected to create 50,000 jobs and promote ancillary industries. The project would lead to transfer of technology in manufacturing of motorcycles and the company would set up exclusive training centers for developing skills and capacity of vendors. Accordingly it is expected to deposit a huge chunk of revenues to the public purse.

The project envisages building and selling global models of Yamaha motorcycles which have never been built in Pakistan before, enabling the country to come at par with the rest of the world. To boost the business of local vendors Yamaha Japan intends to grow a relationship with local spare parts industries with a view to localising the bikes it wishes to produce. It plans to begin producing motorcycles of above 100cc which are in demand globally.

On attaining full production capacity, the facility is slated to produce 45,000 units annually. With the setting up of a motorcycle manufacturing facility in Karachi with EFI, automatic transmission and European standard exhaust system, the company is set to target the Middle East, Central Asian and African markets and contribute towards the country’s exports.

BQIP is the biggest project of NIP, a company set up under section 42 of the Companies Ordinance 1984, to establish & manage world class industrial parks all over the country. The BQIP project has been designed by M/S Jurong Singapore, renowned internationally for their expertise whereas M/S Engineering Associates (EA) with wide experience in this field is given the responsibility for subsequent architectural design, engineering services and construction supervision of the project.

The project offers entrepreneurs with guaranteed uninterrupted power supply through 50 MW captive power plant and all essential utilities like water, gas and telecommunication at the customers’ doorstep. The hallmark of this industrial zone is perimeter wall with controlled entry and exit to the complex offering a safe and secure environment to the industrialists.

Khayal Festival: When cinema lovers meet film walas

The excitement surrounding the celebration of film-making at the festival indeed came with a realisation that there is a genuine interest in new-age cinema. PHOTOS: PUBLICITY

LAHORE: 

It was heartening to see the turnout at the Khayal Festival sessions that touched upon Pakistani cinema. A tsunami of cinema and art lovers, curious young people and pristine Lahori aunties flooded halls at the Al Hamra Arts Complex, excited to hear prominent film-makers of 2013 speak.

The concluding session of Day 1, titled ‘Lights, Camera, Action’, brought together the teams ofWaar and Main Hoon Shahid Afridi. Vasay Chaudhry, Shamoon Abbasi, Amir Munawar, Bilal and his father Kamran Lashari represented team Waar, while veteran Javed Sheikh attended from the MHSA camp.

Javed Sheikh’s experience and passion for cinema was lapped up by eager onlookers. “I was always optimistic that our youngsters would eventually revive cinema in Pakistan,” he said.

“I dreamed about a day when change in the Pakistani film industry would come. Finally it has,” he added. “There are now 100 film projects in the pipeline,” he continued, much to the delight of the crowd. “Waar grew on the foundation laid by Main Hoon Shahid Afridi. It was the first time I saw a film in Pakistan bag 16 shows in a multiplex.”

Kamran Lashari talked about the hard work his son put into Waar, which has received an overwhelming response at the box office. “He worked for nearly four years without getting a salary. Bilal would tell me, that if he could not make Waar a quality film, he did not deserve any money,” he said. Waar producer Hassan Waqas Rana had hired Bilal, but at the time he wondered where the capital would come from.

“Initially we had thought this would be a smaller film,” said Bilal. “But as we got involved in its making, it just expanded. “I honestly feel that a film’s budget is only one aspect of making a good film, because the greater the budget, the higher the expectations. For me, this project was a means to help me improve as an artist,” he added.

Main Hoon Shahid Afridi script writer Chaudhry said he kept reminding himself of 95% percent of Pakistanis who dream of a better life. “By addressing the class divide in our society, I feel I was able to connect better with a wider audience. I also wanted to bring a fresh outlook to the social struggles within the Pakistani society.”

Audience members couldn’t get enough of these film-makers. Questions thrown at Bilal were mostly about the film’s funding and budget, but the director chose not to disclose figures. Some women went on at length about the responsibility film-makers have, as their work is viewed by millions of people. There was criticism leveled at Bilal for the use of profanity inWaar. However, there were many who appreciated his cinematic venture and expressed a desire for more. One elderly gentleman remarked that while MHSA is about the ‘awaam’, he recalls the refined and educated cricketing legends of the ‘50s.

The Zinda Bhaag team was on the panel of a session titled ‘Pakistani Cinema Today’. The debate at this session centered on how an expanded film industry would take shape, with some suggesting that Pakistan should mimick the Iranian model.

Mazhar Zaidi, Farjad Nabi and Meenu Gaur of Zinda Bhaag gave a humble yet incisive look at their experience of making a feature film in the context of art, while meeting the commercial requirement of large-scale cinema at the same time. The trio had worked on the idea for several years before getting into production.

“There is space for first-time film-makers to try and experiment with things. When we started to explore the theme, people inevitably told stories to us,” said Nabi. Gaur added that making the film connect with a wider audience was done by making sure that the initiative was collaborative. “We made sure that everyone had a voice and was heard in the process,” she said.

At a separate session titled ‘Prevalent themes in Pakistani Television Dramas’, director Sarmad Khoosat of Manto had an enlightening discussion of sorts with actor Salman Shahid on writer Saadat Hasan Manto. He spoke of his film Manto, which will be a biopic on the life of the famed writer, but said he has been wary of too much studio-style institutionalisation. The session was also attended by Haseena Moin, Sarmad Sehbai and Asghar Nadeem Syed.

The festival concluded with Zeba Bakhtiar, who shed light on the changing idea of stardom for actors. It seemed suitable since she, like Shehnaz Sheikh on the panel, represented the older lot of the film industry. Her production venture Operation 021 is still under production.

Bearing the brunt: Effect of terrorism on FDI in Pakistan

Government should strengthen political institutions and adopt democratic principles for ensuring stability of political environment which may lead to increased FDI inflows. ILLUSTRATION: JAMAL KHURSHID

ISLAMABAD: Foreign Direct Investment (FDI) was proven to be a significant source of investment for developing countries which helps to bridge saving-investment gap, creates employment opportunities, benefits from transfer of technology, and ultimately gives economic growth of host countries the much-needed fillip.

FDI not only provides developing countries with the much needed capital for investment, it also enhances job creation, managerial skills as well as transfer of technology. All of these ultimately contribute to the economic growth and development.

Developing countries are motivated enough to compete in attracting the foreign investment in order to foster and regulate their industrial sector. FDI has proven to be a key factor in buttressing the third world countries’ national markets.

Therefore, most of the developing countries are very keen to attract more inflows of FDI.

FDI is very crucial for the economic growth of Pakistan as well since its economy faces the dilemma of saving-investment gap. Pakistan does not have sufficient internally generated sources to maintain the tempo of economic activities; therefore, FDI is very important to complement the domestic investment in order to achieve economic objectives. FDI is crucial for Pakistan in order to finance development projects, strengthening industrial sectors, increasing employment opportunities, attaining improved technology, enhancing domestic managerial skills, enhancing productivity and output, improving balance of payments, foreign exchange reserves, physical infrastructure and human resources and ultimately achieving higher rate of economic growth. Economy of Pakistan has been under severe economic pressure because of War against Terrorism. Terrorist activities not only affect that particular region or country’s infrastructure, but it also affects the financial wellbeing of that country, because terror creates instability and uncertainty in the country. This results in loss of foreign investors’ confidence in that economy, thus decreasing the level of foreign investments. Small wonder, Pakistan is also facing this bitter reality of decreased foreign direct investment because of the rising tide of terrorism. Due to the uncertainty and instability in the economy investors feel insecure about their investment and their returns. Global media has played a significant role in spreading awareness about the pitfalls of investing in a country wracked by violence. So, investors do critical analysis of all these situations before pouring their money in international markets. Terrorism has both political and economic implications. They manifest themselves in dwindling FDI inflows, damage to infrastructure, extra cost incurred on security, loss of trade, disturbed balance of payments, and increased insurance premiums, etc.

Beside all these issues, terrorism directly creates risk and anxiety in the prevailing economy that makes individuals more conscious about their expected returns linked with any transaction. Investors think it as a harmful investment. So this increased ambiguity decreases the demand patterns and compels investors to look to some other markets.

Moreover, if governments take steps against these terrorist activities it increases the cost for governance. Pakistan being in a state of war has been bearing its brunt in the shape of an economy down in the dumps.

It’s not one sector alone which takes the fall. The terrorism affects almost every sector of Pakistani economy, be it agriculture, business, industry, services, or tourism.

Investors have chosen to cold-shoulder Pakistan over the years in view of the risks spawned by terror.

The level of foreign direct investment is broadly commensurate to the level of terrorism. The regulatory authorities and policymakers should take some concrete measures in order to reduce the cost of war against terrorism and improve the security conditions in the country. Secondly, the government should strengthen political institutions and adopt democratic principles for ensuring stability of political environment which may lead to increased FDI inflows. Thirdly, Pakistan should take some effective measures to increase electricity generation on an urgent basis. The government should immediately formulate policies aimed at increasing electricity generation and implement these policies effectively to restore investors’ confidence. It will assist in improving economic and financial conditions and also attract domestic and foreign investors. Fourthly, the market size is also a very important variable for increasing inflows of FDI in Pakistan. Finally, the exchange rate of Pakistani rupee should be strengthened in order to lure foreign investors. More fiscal incentives should be offered if the country is to stem the fall in overall investment.

The writer is a researcher at the Sustainable Development Policy Institute

Local bodies: The way forward for economic development

History proves that whenever the local administration was put in place in the past, even in partially true spirit, it always led to some rural and urban development. PHOTO: EXPRESS/ FILE

KARACHI: Finally, the federal and provincial governments are going ahead with local bodies elections, a rare phenomenon in the country’s political history that came on the prodding of the Supreme Court, which will be held in the next few weeks.

It is indeed a good move in a country where the autocratic form of government seems an integral part of the history. Unfortunately, local administration has a low share in economic development even during the rule of elected federal and provincial governments.

The devolution of power is vital for removing a sense of deprivation and achieving economic development and prosperity at the local level. Formation of an effective local administrative structure aimed at decentralising administrative and financial authority, good governance, effective delivery of services and transparent decision-making through institutionalised participation of people at the grass roots level is the only way forward for a poverty-stricken country like Pakistan.

Indeed, the seventh National Finance Commission Award in 2009 was a landmark achievement when all provinces reached consensus after a long time over distribution of the country’s financial resources among themselves as well as with the federation.

Although the Centre has devolved powers to provinces after the 18th Constitutional Amendment, it will not produce desired results until the formation of local bodies with financial autonomy in its entirety. The NFC Award is just an arrangement for resource-sharing between the Centre and the provinces, but the third tier of the government – local bodies – does not come within its purview, which is actually concerned with devolution along with financial autonomy.

This is considered to be a core area for the local administrative setup all over the world, particularly in developed states. In contrast, we have a system where elected legislators for federal and provincial assemblies are responsible for infrastructure development at the local level, which is the prime cause of corruption and disparity in development across the country.

The allocation of resources from the Public Sector Development Programme (PSDP) to the legislators is a “manufacturing fault” of the democratic system in the country, which could be tackled through the establishment of an effective and accountable local bodies system.

Absence of effective local governments also contributes to many structural weaknesses in revenue collection. According to a study of local governments in the Asia-Pacific region, revenues at the local level constitute a mere 5% of the total revenues generated by different tiers of the government in a country. The central government bags close to 89% and the remaining is collected by the provinces or states.

Effective local governments will be able to show a better fiscal effort in terms of tax and non-tax revenue generation for the national exchequer. Apart from this, a small share of expenditure is needed at the local level, which is around 4% of the expenditures made by all forms of government.

History proves that whenever the local administration was put in place in the past, even in partially true spirit, it always led to some rural and urban development. Pakistan has just passed through its first phase of democratic transition. Now there is a pressing need to cultivate democratic seeds at the grassroots level through setting up an effective local government system with full financial and political autonomy aimed at achieving economic development and prosperity in the country.

The writer hosts business talk shows on FM 101 and Radio Pakistan and is pursuing an M Phil in Economics

Industrial waste: A threat to people’s lives

Keenjhar Lake had become poisonous due to hazardous chemical waste found in heavy quantity in the reservoirs which supply water to other cities, including Karachi. PHOTO: SARAH MUNIR

KARACHI: Some time back, it was investigated that hazardous sewage and industrial waste were risking lives. This was initially done in Punjab where the government had invested $20 million for pollution-free water treatment plants in southern parts through a UN development programme.

It was identified that the water in the reservoir was killing plants and animals in the area and severely affecting humans, through infectious diseases, causing blindness and severe burns on the body.

The provincial assembly was informed that Keenjhar Lake had become poisonous due to hazardous chemical waste found in heavy quantity in the reservoirs which supply water to other cities, including Karachi. In the short term, it will impact around three million people living beside the riverbank and in the long term it will affect over 20 million people in Karachi.

A water sanitation plant has been installed at a cost of Rs750 million at Keenjhar Jhimpir area. Apparently, it seems that raw water was seeping through the plant filters and mixing with the drinking water supply. An inquiry report was prepared but no action taken.

Anywhere else, this kind of high-profile matter related to threat to human lives through corporate negligence would emerge as a slap on the government’s face, leading to a swift remedy. Here, we are looking the other way round.

What the policymakers do not understand is that installing water treatment plants alone without ensuring electricity to run them will provide no solution, as people will end up drinking polluted lake water, with the killer poison of chemical waste already flowing in heavy quantities.

The bigger challenge is how to ensure that the reservoir is secured and that leaks in filters of those plants are plugged and the cost of corporate criminal negligence is recovered from the profiteers who have violated health and safety standards.

According to the World Health Organisation report for 2012, the water samples that were collected put the hazard risk at 2.3% as compared to WHO’s standard at 0.75%, indicating high risk. Today, the situation is posing a severe threat of death and disease among the people of Sindh. The only reason this matter came up for discussion in the assembly was because of its significant impact on the Karachi water supply and its reservoirs.

The Ministry of Environment, Environment Protection Agency, civil rights organisations and provincial government officials are silent on the issue.

In Karachi alone, over 275 million gallons of consumable water is illegally sold fetching an approximate Rs100 million a day, for which we pay Rs3,000-5,000 on average to the tanker mafia, that itself further generates Rs10.4 million for the black economy. This further complicates the issue of providing safe and drinkable water to the citizens, both in urban and rural localities.

Had it not been the Karachi impact, the poor people of Sindh would have continued to suffer from dangerous skin and stomach diseases, some of them could not be cured.

Water pollution is a crime across most of the developed world and a notice must be taken to ensure we are safe and secure and to avoid the possible critical risk to the nation.

The writer comments on international relations and public policy

Shrinking spreads: When interest income comes under strain

SBP is keen to ensure that banks will have to lend more to the private sector to earn higher spreads CREATIVE COMMONS

KARACHI: 

These are interesting times in the Pakistani banking sector. After several years of abnormal profits that belied the depressed (and depressing) economic conditions, banks are experiencing a drop in earnings because of shrinking spreads. I believe these shrinking profits will benefit the sector in the long run: the morphine drip is running dry, forcing the banks to evolve their strategies and think more carefully about sustainable business models. Successfully building a sustainable model involves developing diversified revenue streams such as trade finance, consumer lending, alternative banking channels, branchless banking and the SME sector.

Pakistan has a relatively strong and competitive banking sector. In the past two decades the privatisation of the major banks – HBL, UBL, MCB and ABL – and the entry of international players have contributed towards rapid progress in terms of regulation, technology, systems, organisational culture and human resources. There are currently 5 public sector, 17 private, 5 Islamic and 7 foreign banks in Pakistan. The SBP has gradually raised capital requirements and has expressly stated its intention to create conditions conducive to further consolidation in the field.

The four major privatised banks and National Bank of Pakistan (NBP) have a significant share of the market (53% of industry assets in FY2012) and are commonly referred to as the Big 5. NBP experiences all the advantages and disadvantages that come with being a government owned bank and is an altogether different animal. The remaining four comprise 40% of the assets: their size and outreach grant them significant economies of scale and scope as is evidenced by their average ROE of 22% compared to the industry average of 15%.

In the last five years, large scale government borrowing to finance an ever increasing budget deficit and risk aversion in lending has led to commercial banks investing heavily in treasury bills. The excessive government borrowing from commercial banks has crowded out the private sector resulting in financial disintermediation. In the three year period 2010-2012, industry deposits grew annually at 15.6% while industry advances (loans) only grew 5.6% showing that banks have been increasing investments, specifically in government borrowing. Advances to Deposit Ratios for most developed markets range between 80% and 120%, but are around 55% for Pakistani banks. The model has been simple: use depositors’ funds to buy treasuries and run a skeleton crew on the credits side.

The squeeze

Low cost of deposits and a high discount rate because of rising inflation has resulted in large banking spreads with minimal effort on the part of banks. This situation is now changing; government borrowing from scheduled banks is close to Rs2.5 trillion – unsustainable for banks as the government cannot afford to repay this amount any time soon

SBP is keen to ensure that banks will have to lend more to the private sector to earn higher spreads

The commercial banks have reaped large profits at the cost of depositors and borrowers and the SBP is now focusing on reducing it by increasing minimum required saving rate offered on savings accounts from 5% to 6.5% linked to the repo rate. At 6.5%, real returns on savings are still negative and in the longer run the SBP might move it even higher. The discount rate has also been brought down to 9% from 12% last year because of lower inflation and industry pressure.

The game plan

With core revenue stream (interest income) under stress, banks have to focus on two things:

Shore up interest income by mobilising additional deposits and increasing lending. Interest income will always be the bread and butter for a bank. Traditionally banks have tried to attract Casa (current and savings) deposit because it is low cost and stable. High Casa ratios are seen as an indicator of strong fundamentals. Given that Savings Deposits have a cost of 6.5% (even higher in tier-based accounts), Current Deposit is now the focus area and we are already seeing aggressive marketing and product offerings as banks compete for current deposits. These are harder to come by as customers are becoming increasingly rate sensitive and ubiquitous daily return tier-based deposit products mean even transactional accounts can earn high rates on a daily basis.

Banks will also look to increase advances, but it will take a bit longer for them to realign their structures to scale up lending.

Increase revenue from non-interest income side. This is consistent with most developed markets where fee & commission income constitutes a much larger percentage of total income from customers. At present Fee, Commission and Brokerage Income on an average contributes 10% – 20% to the total revenues for the banks. They will want to increase this up to around 30% in the medium term.

Musharraf, one step closer to freedom

Musharraf was arrested on Oct 10 over the alleged murder of the deputy cleric of Lal Masjid. PHOTO: AFP

ISLAMABAD: A trial court on Monday granted former president Pervez Musharraf his request for bail in connection with the murder of a cleric from the Lal Masjid, Express News reported.

The court set Musharraf’s bail at two surety bonds of 0.1 million rupees each, after considering new video evidence presented before the court today.

“The court has granted him bail,” Afshan Adil, a member of Musharraf’s legal team, told reporters. “Musharraf will not leave the country and will face all the cases.”

She also said that the money would be paid on November 5.

Musharraf is still on the Exit Control List but he can freely move within the country.

Musharraf was arrested on October 10 on the order of Islamabad High Court (IHC) over the alleged murder of the deputy cleric of Lal Masjid, Abdul Rasheed Ghazi and his mother during a military operation in 2007. The ex-president had filed an application before the Additional District and Sessions Court and sought bail in this case.

During the course of hearing on October 30, attorneys from both the sides completed their arguments and judgment had been reserved till November 1. The hearing had further been delayed to November 4 to allow the prosecution more time to collect evidence.

General Musharraf’s counsel, Ilyas Siddiqui, had maintained that his client was wrongly implicated in the case as the First Information Report (FIR) was based on mala fide intentions.

Advocate Tariq Asad, representing the prosecution, termed the court’s decision unlawful, adding that they fully intend to challenge this decision.