Money Matters

Reengineering investment priorities

By Hussain Ahmad Siddiqui
Mon, 09, 19

The Foreign Direct Investment (FDI) has been rather low in the year 2018-19, recording $1.73 billion, almost half of $3.47 billion received in 2017-18, though it picked up from a major dip between the periods 2011-12 to 2014-15.

The Foreign Direct Investment (FDI) has been rather low in the year 2018-19, recording $1.73 billion, almost half of $3.47 billion received in 2017-18, though it picked up from a major dip between the periods 2011-12 to 2014-15.

Nonetheless, the FDI is expected to rise in the coming years as a result of improved economic indicators and recent measures adopted by the government for creating an environment conducive to business.

Financial sector is the primary recipient of the FDI, followed by construction, oil & gas, chemicals and textiles, besides others. China is by far the largest investor. However, huge investments are forthcoming from Saudi Arabia, Qatar, the United Arab Emirates (UAE), Russia, and other countries.

Saudi Arabia has committed in February to invest around $20 billion, whereas four projects in mineral resources have already been identified in August for the implementation in the first phase.

Likewise, the UAE plans to invest $6.2 billion in Pakistan in various industrial and service sectors. Qatar’s commitment of $3 billion includes significant portion of the FDI. Also, various Chinese companies are willing to invest up to $5 billion by way of shifting their industries from their home country to Pakistan. A Dutch oil company has also shown interest in investing $2.8 billion in the field of terminal & storage facilities of LNG (liquefied natural gas).

It is ironical that almost all the expected investments are in conventional areas, and non-conventional areas such as capital goods industry have not been tapped by Pakistan effectively. The Board of Investment has identified priority sectors for investment i.e. food processing, textiles, IT (Information Technology) & ITeS (IT enabled services), logistics and automobiles, in the same order. There is therefore a need to consider expanding the FDI to new and diversified areas, which are in Pakistan’s future interest and also have potential for foreign investment too.

Developing engineering industry, in particular, in capital goods sector, is considered to be vitally important for stable economic growth of any country. Benefits of this sector include generation of large-scale employment as a spin-off effect, sociopolitical uplift, increase in exports, and acquisition of advanced technology. But import substitution and, resultantly, improvement in trade balance, is the most cherished goal of strengthening local engineering industry that currently is almost non-existent with all the engineering industrial units in public sector having been closed or put on sale. Trade deficit during 2018-19 was $31.8 billion, whereas machinery import was 14.5 percent of the total imports.

Import of machinery at large-scale has remained a cause of major concern for the government for many years, but no concrete steps were taken to improve the trade balance. In recent years, the deficit has rather widened, and there are no signs that trade deficit target of $24.9 billion for 2019-20 would be achieved, given the present conditions. It is therefore imperative that new opportunities for investment in capital goods sector be exploited to reduce trade deficit to a reasonable level. Some of the specific projects proposed to be set up in large-scale manufacturing sector as well as in the SMEs (small and medium enterprises) sector, with foreign collaboration, identified for the FDI are discussed below.

The government plans to enhance installed capacity of power generation to 42,000 MW by 2030 based on coal, gas, hydroelectric, and other sources of energy involving an investment of $40 billion, said Minister for Power Omar Ayub Khan last week. This means the demand for power plant machinery will increase manifold in subsequent years.

Major equipment for power plants such as turbines and generators could be locally manufactured at new facilities for which necessary infrastructure exists. Refurbishment and upgrading of installed large turbines and generators in power generation units and oil & gas industry could also be undertaken.

In view of new investment in chemicals, fertiliser, and other processing industry, it is economically viable to manufacture locally medium and high pressure valves, which are high value-added ancillary components.

Development of infrastructure facilities such as roads, highways, canals, dams, and water reservoirs is being undertaken at a large-scale. This requires a wide variety of construction and earthmoving machinery on a regular basis. Average cost of annual construction machinery import is $400 million, which is growing rapidly. A range of earthmoving machinery like bulldozers, scrapers, excavators, motor graders, dump trucks, mechanical shovels, dredgers, dragline equipment etc. should be produced locally under a phased program.

Agriculture is the mainstay of the economy. Since food security is among the priority action areas, the government has launched a number of programs to expand existing capacity. This necessitates provision of modern agricultural machinery. While tractors, harvesters, and small-scale agricultural machinery are being produced locally, the total market size of agricultural machinery is estimated at $1.32 billion annually. Pakistan imported agricultural machinery amounting to over $125 million in 2018-19. There is thus vast scope for local manufacturing of combine harvesters, cultivators, and other machinery and equipment for harvesting, threshing, tillage, seeding, planting, etc.

Board of Investment will be well-advised to promote these projects to the prospective investors from abroad as well as domestic as a matter of policy, and to extend necessary facilitation to them.

The writer is retired chairman of State

Engineering Corporation