Amid the rising, falling sectors, the investors choices make a fascinating reading, Which is the right moment to put your money in a business, and when should it be taken out to avoid loss, is a course the less observant and the less trained must take at their own risk. Even though it can be said that manipulation often reigns supreme where money is weighed and not counted, an error of judgement can lead to dire consequences. And once this becomes known, while the government may overlook and the law may grant a pardon, the market doesn't forgive .

The smaller investor for whom buying and selling and setting up industry is more than just a game, is often the one who ends up paying, of which the occasional stock exchange crashes and the current real state 'slump' are prime examples. Less money means less influence to effect laws that protect and don't discriminate.

This brings in the issue of standard rules and regulations to govern the working of revenue-generating sectors in the country and of strict monitoring to ensure as fair a system as is humanly possible. The special report this week points out the long haul to the fairland.

Contrary to official claims, setting up new industry is beset by rising capital costs, high input prices and an unfair taxation

By Mushfiq Ahmed

Every other day one hears tall claims made by the economic managers of the country. It seems that the only task assigned to them is to paint a rosy picture of the economy. They continue to claim that Pakistan's exports have risen beyond expectations and foreign exchange has swelled manifold. Above all, they attribute these 'successes' to the economic reforms that their government has brought about over the last couple of years.

But taking a closer look at the investment scene in the country, one can hardly find any major investment having taken place in the industrial sector under the present government. Most of the investment has come in the telecommunications and oil and gas exploration sectors and not in the manufacturing sector.

According to industrialists, establishing a manufacturing concern has become very costly mainly because of high prices of land. Running an industry is even more difficult because the prices of electricity and gas are increasing by the day.

"The present situation is bad for large scale manufacturing and worse for small and medium industry because of ever-increasing costs of production," says Ameen Bandukda, chairman SITE Association of Industry. He says some new units were established in SITE area during the last four years but now all of them stand closed. "This shows the situation has not improved much," he says.

Another impediment in the growth of the industrial sector is the absence of clear-cut government policies. Industrialists say no worthwhile progress has been made on working out policies for a textile city and national industrial parks. Announcements about these projects were made quite some time ago, but so far no substantial development has taken place.

Following are some of the reasons behind the lacklustre investment in the industrial sector.

Easier options

"People are going for easier options. They prefer to invest in real estate and stock market where making money is easier and trouble-free," says Engineer M A Jabbar, former vice-president of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

Dr Asad Saeed, an independent economist, says most of the investors are attracted by sectors which offer gains in quick time. The most popular of these sectors are real estate, stock markets and commodity trade. In the industrial sector, there is little possibility of making these quick gains. "You can earn in stock market in only six months what you will be earning from industry in five years," says Dr Asad says. He adds: "All our economy is focussed on short-term gains. Currently, there is an asset price bubble which is not backed up by industrial and agricultural development. This year our economic growth will come down to 6 per cent. The most probable scenario is that our GDP growth rate will soon come down again to 4 per cent to 6 per cent. A breakthrough, which people had started hoping for, is not likely."

Unsustainable policies

The sustainability of monetary policy is also a must for enticing people into investing in the industrial sector. But unfortunately this important ingredient is lacking. The sudden escalation of mark-up rates from a low single digit to double digit in a matter of a couple of years is not good for our industry, says Dr Asad. He says one reason why there is no long-term planning in our country is the lack of political stability. "Once a government changes, the newcomers instantly undo what the outgoing government has done in its tenure."

High cost of production

Price of electricity is the major input cost in the manufacturing of an industrial product. Running industrial units on costly electricity is not feasible for most of the investors. Similarly, gas price for industrial sector has increased manifold in the last two and a half years which means local production and availability of gas has not resulted in any advantage for the industrialists.

Industrialists are of the opinion that the government should meet the energy requirements from whatever source it can and offer it to the industrialists at affordable rates. If it fails to do that, the cost of production will rise beyond expectations in the years to come. They, therefore, demand that gas should be provided at cheap rates not only for manufacturing but also for power generation.

High real estate prices

Ever-increasing prices of land have also become a major problem for the prospective investors willing to invest in the industrial sector. Prices of lands near the existing industrial units are very high while new industrial estates are being set up in remote areas where establishing an industry is not feasible. Industrialists say the first and foremost issue for industrial investors is to purchase lands at a reasonable price but most of the time they find out that it's no easy task.

Unfair tax rates

The government's tax collection base is very limited and tax rate is unjustifiably high, particularly for the corporate sector. There are people who do not pay even a single penny in taxes. Those who pay have to pay a very large chunk of their income. The government should make efforts to widen its tax base and reduce the rate of corporate taxes.

Dr Asad says capital gains on share trading and real estate trade are not taxed while at the same time the rate of taxes on the industry is very high.

"There are some factors, which the government can't control and for which it should not be blamed. High international oil price is such a factor. But there are areas where it can bring about improvement, but it is not doing that. It can tax real estate sector. It can tax trade in stocks. But it's not doing that."

Some of the stumbling blocks for investment are too heavy to be removed without a thorough reform of the political economy of the country

By Khalid Mustafa

The worsening law and order situation, fragile democratic setup, concentration of power at the top, lack of independence for decision making and bureaucratic hurdles are some of the factors listed by experts as hampering investment in Pakistan.

Haroon Farooki, president Karachi Chamber of Commerce and Industry, says if these issues are resolved, investment in Pakistan could jack up manifold. Pakistan has an ideal investment policy, he says. "Foreign investors, however, are not coming here at a pace at which they should."

Foreign direct investment (FDI) inflows during July-March this fiscal year have increased by 181 per cent to $2.224 billion if compared with the investment of $792.6 billion in the corresponding period during the last fiscal year.

Documents available with The News on Sunday show that communication sector received investment of $1.035 billion, power sector of $304 million, financial business of $265.5 million, oil and gas sector of $216.9 million, trade of $81.9 million, construction $54.4 million and other sectors $266.4 million during the first nine month of the current fiscal year.

During this period, Pakistan received an investment of $635.8 million from UAE, $369.3 million from USA, $272 million from Saudi Arabia, $156.9 million from Switzerland, $136.7 million from UK and $66.5 million from the Netherlands.

Out of $2.244 billion invested by the foreigners so far this year, $921.3 million are the proceeds from the privatisation of three major entities (Karachi Electricity Supply Company) KESC, Habib Bank Limited and Pakistan Telecommunication Company Limited (PTCL). But Haroon Farooki says privatisation proceeds should not be counted as FDI.

He says in a country like Pakistan which is facing a future energy crisis and does not have solid plans to tackle it, foreign investors will think twice before bringing their money in.

Recognising the importance of law and order as a major factor in the rise and fall of investment, Farooki says law and order is bad owing to a number of factors -- including ethic, religious, political and international ones. Unfortunately, for Pakistan most of these factors are too complicated to allow a simple resolution.

He says bureaucracy also has a role if enough money is not being invested in the country because bureaucrats hesitate from taking important decisions, for instance, on resolving trade-related problems because they fear their boldness may land them in the hands of the National Accountability Bureau (NAB). So, he suggests, NAB's role has to be re-defined if investment and business have to flourish.

At the same time, Farooki acknowledges that during the last two to three years economic policies have improved and there have been no U-turns on policy decisions, which is why investment portfolio also improved.

But official and business sources say there are areas where investment has not even trickled in, for instance, in corporate farming. These sources blame this failure on the government's ability to carry out land reforms.

Jehangir Bashr, Secretary Board of Investment, claims investment is increasing by leaps and bounds in sectors like information technology, telecommunications, housing and oil and gas. According to him FDI alone has registered a five-fold increase during the recent times.

According to Jehangir Bashr, the government has plans to bring in $27.32 billion in Pakistan in the next five years under a special initiative enjoying direct oversight of President Pervez Musharraf.

Official documents seen by TNS reveal that two main foreign auto-makers -- Volkswagen and Diamler Chrysler -- have plans to invest $7.15 billion in Pakistan.

These documents show international hoteliers are bringing in $0.42 billion investment in the next five years with plans to build five hotels in big cities. The construction will have a very positive impact worth $2 billion on Pakistan Gross Domestic Product (GDP), the documents reveal. The break-up of investment plans in hotels is as follows: A Grand Hyatt hotel is to be constructed in Islamabad with an investment of $1 billion, a Four Seasons hotel will be built in Lahore with an investment of $0.1 billion, a Movenpick hotel will be built at the Lahore airport with an investment of $0.06 billion, A Fairmount hotel will be constructed in Karachi with an investment of $0.1 billion and a Sheraton hotel will be built in Patriata with an investment of $0.06 billion.

The plans for investment in the housing sector are equally ambitious. The sector will see an investment of $6 billion in the next five years which will have an impact of $ 30 billion on GDP, say the documents. According to the projects in pipeline, in Lahore, a River City will be constructed with an investment of $2 billion, in Karachi a Sea City will be built with an investment of $2.5 billion and in Islamabad/Murree a Tourist City will be set up with the investment of $1.5 billion.

In the power sector, the documents show, the government is working on three major projects to generate 11,466 megawatts of electricity. A German firm, Siemens, and an American company, AES, have submitted expressions of interest to generate 5000 megawatts each from coal in Thar. Similar the government has plans to generate 969 megawatts from Neelum-Jehlum Hydropower Project. For this project, the government is soon to strike a deal with some foreign firm. As a short-term solution to the problem of energy shortages, two thermal power plants with the combined capacity to generate 400 megawatts will be installed as early as is possible, say the documents.

Jehangir Bashr clarifies that in sectors where there is little or no investment, the government has not given up hope and doing its bit to encourage investors. He says the government is still working on corporate farming, though he does not want to answer the question if there is some political resistance against the idea. The government may announce in June to allow bank loans to facilitate investment in corporate farming.

Involving private sector in formulation of industrial policies is key to growth in the sector, believes Mohsin M Syed, Chairman PIEDMC

By Shahzada Irfan Ahmed

The unfriendly attitude of government departments and agencies responsible for providing basic utilities like gas, water and electricity has been a major impediment in the growth of the industrial sector in the country. Besides, the complexities involved in buying land for establishment of industrial units have distracted many from investing in this part of the world.

However, says Mohsin S Syed, Chairman Punjab Industrial Estates Development and Management Company (PIEDMC), the situation is changing gradually as the government involves the private sector in the search for a solution to these problems. Mohsin, who owns a big engineering concern in Lahore, heads a 24-member board that manages affairs of PIEDMC. 19 of these 24 members hail from the private sector.

Talking to The News on Sunday, he says the purpose of developing modern industrial estates, including the Sundar Industrial Estate on Raiwind Road near Lahore, was to put an end to the perennial problems faced by the industrialists. "I still remember the moment when I returned from abroad and tried to set up an industrial unit in Kot Lakhpat. There was no phone available there and we had to come to Gulberg to make a call. Furthermore, it took me about a year to get a transformer installed at my place."

Mohsin says these are just a few examples; the list of problems faced while setting up industry is too long to be discussed in one sitting. "But now we can boast of setting up a facility where the industrialists can find one-stop solution to all their problems," he says referring to the Sundar Industrial Estate. The estate, which spreads over 1043 acres of land, was sold out to 607 applicants out of a total of 667 through balloting. And quite amazingly, the whole process took only 18 months.

Mohsin tells TNS that "while planning the industrial estate, we decided to first facilitate the local investor. We knew that once he is satisfied, he will convince his expatriate friends to invest in the country and the foreigners will definitely follow next. Targeting the foreigners directly has never been a successful strategy."

He says all the investors in Sundar must follow the bylaws drafted and enforced by PIEMDC. For example, they are asked to complete their projects within a stipulated timeframe, failing which their allotments are likely to be cancelled. On the other hand, they have been saved from the extortion they had been facing at the hands of the government agencies, he says. Mohsin says applicants are given electricity connection in a day. No social security staffer can visit any unit without bringing it to the notice of the estate authorities and neither can any government official disturb anybody in the name of inspection.

He tells TNS the Punjab government has given a Rs1 billion loan for the establishment of the Sundar Estate. "We have generated Rs3 billion through the sale of plots. We were able to market the plots at a price of Rs 35,00,000 per acre," he says.

Mohsin says "we have even kept the distribution of electricity with us. We will buy electricity in bulk at cheaper rates from Lahore Electric Supply Company (Lesco) and sell it to industrial units at retail rate. The difference in the prices will go to PIEMDC that it will spend on the maintenance of the industrial estate," says the chairman.

He goes on to say that the establishment of industries in Sundar will lead to generation of 60,000 direct and 600,000 indirect job and "the project has been so successful that it is being replicated all over Pakistan under the National Industrial Parks plan."

Mohsin says that all the 102 acres earmarked in Sundar Industrial Estate for foreign investors have been sold out. To mention a few, Haier has purchased 10 acres, LG 25 acres, Stiefel Pharmaceuticals of the USA 5 acres, Pacific Pharmaceuticals of Germany 7 acres, Pepsi Cola International 14 acres and Honda Atlas 20 acres. 

Lack of investment opportunities led to escalation in real estate prices

By Shahzada Irfan Ahmed

Last couple of years saw huge investments pouring into the country's real estate sector, sending the prices of land skyrocketing. During this time, a whole breed of real estate agents and real estate agencies prospered, with an annual turnover worth billions of rupees. The quantum of investments in the sector was so high that the government decided to bring it under the scanner and impose tax on real estate transactions. However, it had to drop this plan due to pressures from certain quarters, days before the announcement of the annual budget last year.

The current surge in real estate prices was undoubtedly caused by the increase in foreign remittances after 9/11. Soon after the incident, a large number of Pakistanis settled abroad, especially in the UAE and the US, transferred their money to Pakistan. They feared their assets deposited with foreign banks might be bracketed with the funds used to support terrorist activities and confiscated. Besides, a large number of expatriate families realised their future in the foreign land that they had so far thought to be their own was not safe. Out of this fear they transferred their money back home and bought land in Pakistan to build their homes once they returned.

Once the prices real estate prices started to shoot up, there was no looking back. The prices rose by the hour, prompting people from every walk of life to invest their savings in this sector. The temptation was so strong that people invested mindlessly in property that as yet existed only on paper, inside a file. People would pay a small fraction of the price and become owners of a plot located within a file. The file would then change hands endlessly and successive owners would make gains on the investments made. Meanwhile, no one would have any idea where exactly the plot was situated or whether it existed.

However, in the last six months the amount of money invested in the real estate sector has decreased to a great extent. Furthermore, a lot of the money of the small investors in the sector is stuck, leading to worries for them.

Counting the reasons for this downslide, Ahmed Nabeel, an investment expert at the Lahore Stock Exchange (LSE), tells The News on Sunday that though commercial investments made in building plazas, shopping centres and a few housing societies are still giving good returns, those made by individuals are not reaping fruit. He says "the maximum losses have been seen in deals where files have been changing hands."

Nabeel goes on to say that only the prices in DHA Karachi have shown improvement whereas in DHA Lahore the prices are at least 20 per cent lower than what they were last year. "DHA is a good example because prices of plots there are truly representative of what's going on in the country's real estate market." Besides, he says land prices in Islamabad and the NWFP have decreased as the areas have been declared high-activity seismic zones. "Another reason for lack of interest in file business is the looming fear of a government crackdown on those conducting benami (anonymous) deals in the real estate market," he adds.

Nabeel says there is a common perception that government also wants to bring the prices of real estate down to a 'reasonable' level as high real estate prices impede inflow of FDI (Foreign Direct Investment) to a great extent. "Studies show that a few years back, the price of land would hardly account for 40 per cent of the total project cost whereas today the price of land stands around 80 per cent of the total project cost in most cases. This trend will have to be reversed if we want our industrial sector to grow," he says.

Another factor that has discouraged speculative buying is the official warnings issued against investments made in areas like Gwadar. Gwadar's land is being sold to people from outside Balochistan at high prices whereas locals fear a major change in the demography of the province through an influx of 'aliens'. An official statement issued last year had mentioned that many deals related to Gwadar lands had no legal standing and guarantees.

Syed Ather Ali Kazmi, President Lahore Real Estate Advisors' Association, tells TNS "the prices of real estate in thickly populated areas have not decreased whereas, the investments made in the suburbs -- where the leading industrialists, traders and professionals have invested huge amount of money --  has shown a downward trend."

Kazmi is also on the panel of several local and international banks as their certified land-price evaluator. According to his observations, the small investors who had blindly followed big investors, are in a fix for the last one and a half years. "They are unable to get their investments back as the big-money investors have already withdrawn after making heavy gains. When too many investors want to withdraw simultaneously, selling pressure builds up and brings down the prices," he adds.

Kazmi tells TNS it was the lack of investment opportunities that had led to escalation in real estate prices. "People thought that the safest way to secure good returns was to invest in the real estate sector. If there had been large scale industrialisation in the country, a lot of this investment would have gone there," he adds.

Kazmi says returns in real estate sector are so high in recent times that even the established industrialists have been investing the loans secured to expand their industrial units in real estate. "The banks extending these loans and overdrafts (ODs) were least concerned about where they were being invested. All they were interested in were the returns they were getting on these loans. But now the situation is changing as banks have been directed to ensure that the loans are used for the purpose for which they have been secured," he concludes.

The imperfect interest rate structure of the financial sector in Pakistan calls for a policy review on the part of both the State Bank and Ministry of Finance

By Azhar Mahmood

The events of 9/11 have transformed the financial sector of the world. The anti-terror war launched by the super power has ended up targeting almost every sector of the financial and monetary world.

The western and far-eastern countries today fulfil all requirements of the American federal treasury laws, rules and regulations and their banking and financial sectors are richer for it.

In Pakistan we are still dragging our feet on tabling an anti-money laundering bill in the parliament, and at the same time we have failed to establish the proposed federal anti- financial crimes agency, which was cleared by the policymakers of the country some three years ago.

The net result is that our banking and insurance sector has failed to attract foreign investments despite the fact that financial prospects of both these sectors have improved dramatically. These legislations have not been approved and promulgated because there is a serious lack of coordination among policymakers and parliament.

The Pakistani banking and financial sector is under a constant threat from the US Patriot Act, which was promulgated to face situation arising out of the 9/11 crisis. A senior officer of the State Bank of Pakistan says: "Compliance of all local and international laws regarding money laundering should be ensured. If an exchange company is maintaining a nostro account with a US- based bank, it must ensure compliance of the clauses of US Patriot Act, relating to money laundering."

SBP has failed to devise and promulgate new prudential regulations for the exchange business in the country with a result that the exchange markets of the country are routinely faced with a mini-crisis. This affects both the net exchange position of the country and consequently the interest rates.

The abolition of fixation of exchange rate by SBP in May 1999 led to a windfall for the banks here, but at the same time this has drastically affected the prevailing interest rates in the country. Although the SBP plans to reform the prevailing exchange rate fixation mechanism, but four months after pledging the change, its policymakers have failed to convene a meeting of the stakeholders to solicit their views.

The System of Karachi Inter-Bank-Offered Rate (KIBOR) has its own limitations. KIBOR cannot offer interest rates for a period exceeding three years.

The Interest Rates Structure of housing finance is also imperfect because the billions of rupees of housing loans are not covered by guarantees. This imperfection is also contributing towards the imperfect interest rate structure of the country. The imperfect market of interest rates in the country directly affects negatively towards all segments of national economy, particularly investments made in shares and fixed investments, sought by the manufacturing sector.

The interest rate market of the country is also directly affected by Ministry of Finance's inability to take decisions with regard to proposed enhancement or curtailment of rate of returns offered to National Saving Schemes investors. At the same time the ministry is reluctant to make a final decision on long-term bonds.

Officials at the State Bank and the Ministry of Finance share views without communicating to the benefit of the financial sector. The policymakers at the central bank somehow feel that they are doing their bit to control the interest rates in the country by issuing a 6-monthly Monetary Policy.

Other reports have their impact on the market, too. For instance the daily reports issued by leading brokerage houses of the country which continuously spread such rumours which serve their financial or business interests. The policymakers at the SBP are aware that brokerage houses are challenging their claims, figures and even policy decisions, but they do not contradict, deny or confirm the reports generated by these brokerage houses. These reports add to the confusion in the market and discourage investors.

The prevailing imperfect interest rate structure of the financial sector in Pakistan calls for a policy review on the part of both SBP and Ministry of Finance. At the same time is needed  promulgation of pending but already approved laws, regulations and rules.

The policymakers of the country should establish a broad-based committee comprising Ministry of Finance, State Bank of Pakistan, Pakistan Banks Association and other stakeholders to thrash out the issues and make practical recommendations, keeping in mind legal, business and accounting and finally reporting requirements of the western countries.

Stock market is experiencing an unprecedented boom but not every investor is winning

By Salman Siddiqui

The Karachi Stock Exchange (KSE) was declared the best performing stock market of the world in 2002. It is now well into the fourth year of being one of the best performing emerging markets of the world as declared by Businessweek and USA Today.

But the real situation at the Pakistan's largest exchange may not be as rosy as it looks. Shareholders, investors and common people have some concerns and queries about the speculative and suspicious behaviour of some players at KSE and their influence on the exchange's growth (both in terms of earning and index). Since the beginning of the current calendar year, KSE 100-share Index has registered an increase of 2020.22 points or 21.139 per cent to close on 11,576.83 points on Tuesday, May 9, 2006. It stood at 9,556.61 points with a total market capitalisation of Rs 2.781 trillion on December 30, 2005, the last working session of the last year at the exchange.

Similarly, the benchmark KSE 100-share Index has surged by more than one thousand per cent during the last ten years (1996-2006). The index stood at around 1,500 points in 1996 but on April 17, 2006, it hit a record peak of 12,273.77 points with overall market capitalisation standing at Rs 3.459 trillion on that day.

Some of the shares registering huge profits at Karachi Stock Exchange come from sectors like banks, cement manufacturers, automobiles, energy and fertiliser manufacturing.

Analysts are expecting an earning growth of 30 per cent for the investors by the end of the current year. Last year, growth in earning was recorded at 35 per cent. These figures show that the bourse has been a major source of making money for a large number of investors. But not everyone wins here.

What should be the strategy which more people win and fewer lose? Of course, there can never be a win-win situation for the players involved, but some mechanisms can be devised to equitably share risks and benefits.

Analysts say investing in the stock market is not different from investment made in other businesses like import and export and industry. But they also caution that there are some vital differences. For instance, investors should not use 'borrowed money' for buying and selling shares.

But KSE, like all exchanges, has its fair share of speculators. Most of the losers at the bourse come from this section of investors. Long-term investors are mostly in the winning territory because they calculate and analyse earning opportunities before investing. Speculators, on the other hand, invest on rumours, sometimes going beyond their capital capacity. This forces them to borrow money under Continuous Funding System (CFS) which is not a safe mechanism of investment and binds them to settle their loans within a month. They also allow big players to manipulate the market's movement through rumours.

Now a look at the sector which have been the most profitable at Karachi Stock Exchange during the current calendar year.

Profits of all the banks listed at KSE grew by 99 per cent in 2005. These listed banks represent 75 per cent of the entire banking sector in Pakistan and they have earned an after-tax profit of Rs 47.5 billion in the year ending December 2005. National Bank of Pakistan earned the highest profit of Rs 12.710 billion, a growth of 104 per cent. Earning on its shares also registered the highest rate of growth -- 21.5 per cent during the last year.

Cement manufacturing has been another high earner. According to their recently published nine-month reports, cement manufacturers have recorded double-digit (14 per cent) growth in demand in the fiscal year 2005-2006 so far which has resulted in a regular increases in cement prices.

Cumulative profitability of cement companies during nine months that ended on March 31, 2006, stood at Rs 8.5 billion, showing a growth of 69 per cent when compared against the figures for the same nine months a year ago.

On a quarter to quarter basis, profits of car assemblers rose by 284 per cent to Rs 1.8 billion as compared to Rs 474 million that they earned in the first quarter of fiscal year 2005. Major reason for this huge jump in the profitability in the auto-sector is depreciation of the Japanese Yen against Pak Rupee which rose by more then 7 per cent, a downward revision in international steel prices and the income that the car makers have earned on their gigantic cash deposits.

Overall earnings of oil refineries listed on the stock exchange, however, declined to Rs 2.882 billion during the nine months of the current financial year. On a  year-on-year, this shows a drop of 43 per cent.

Oil marketing companies can go either way. If oil prices remain high, inventory gains can lead to positive earning surprises for these firms, says a leading analyst.

But these success stories apart, price to earning ratio for share trading is low at Karachi Stock Exchange as compared to other regional exchanges, like bourses in Singapore, Malaysia and Indonesia etc. Price to Earning (PE) ratio of all listed companies at KSE is in single digit (nine) while PE at other regional bourses is anything between 12 to 14.

The coming federal budget, likely to be announced by the federal government in the first week of June, is expected to effect changes that may drag the stock exchange's index down to a level of 10,500 points. In the present scenario, however, there is no other fear factor which can jolt the market's positive sentiment.