IMPACT OF FDI ON THE GROWTH OF TELECOMMUNICATION SECTOR IN PAKISTAN

TO ASSESS THE

“IMPACT OF FOREIGN DIRECT INVESTMENT ON THE GROWTH OF

TELECOMMUNICATION SECTOR IN PAKISTAN”

A RESEARCH PROJECT SUBMITTED TO

DR. MUHAMMAD SARWAR ANJUM

Submitted By

Ashfaque Ahmed Jamali Muhammad Ali

Reg No # MM093078 Reg No # MM093064

Section # 02 Section # 02

FOR THE COURSE OFFINANCIAL ECONOMICS

Abstract

This paper investigated the impact of Foreign Direct

Investment on the growth of Telecom Sector in

developing countries like Pakistan. Due to data and

statistical knowledge limitations, a qualitative research in

being conducted. From analyzing existing literatures, a

big impact of Foreign Direct Investment has over the

growth of Telecom Sector in Pakistan. Foreign Direct

Investment is important for Pakistan and its telecom

sector is increasing rapidly. However, the Telecom Sector

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IMPACT OF FDI ON THE GROWTH OF TELECOMMUNICATION SECTOR IN PAKISTAN

needs time to develop further in order to play more

effective role on economic output.

Table of Content:

1. Introduction …………………………………………………. 3

2. Objectives …………………………………………………. 5

3. Research Methodology …………………………………………………. 5

4. Theoretical Hypothesis …………………………………………………. 5

5. Literature Review …………………………………………………. 6

6. Model …………………………………………………. 9

7. Result & Discussion …………………………………………………. 10

8. Data Analysis …………………………………………………. 12

9. Conclusion …………………………………………………. 15

10. References …………………………………………………. 15

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IMPACT OF FDI ON THE GROWTH OF TELECOMMUNICATION SECTOR IN PAKISTAN

Introduction

The economy of Pakistan is the 27th largest economy in the world in terms of purchasing power, and the 48th largest in absolute dollar terms. Pakistan's economy mainly encompasses textiles, chemicals, food processing, agriculture, telecommunication and other industries. The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing conflict with neighboring India. However, IMF-approved government policies bolstered by foreign investment and renewed access to global markets have generated solid macroeconomic recovery the last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy and open the door for investors to invest in different sectors of economy.

Remember, the olden days when having a fixed telephone connection were taken as a privilege and a mark of exclusiveness. People were used to wait for long to get a landline telephone connection and sometimes to no avail even after years spent on waiting. Many of us might remember the days when a lord was accompanied by a person with a large mobile set in his hand and it was not much back in the past. Then telecommunication advancement started taking place in the country and geared up with the start of the new millennium.

Now every one is not only facilitated to communicate through most modern means of telecommunication but also benefited in economic terms. The recent past has witnessed unprecedented growth in Pakistan telecom market as new operators were allowed to enter and ring their own tones to attract potential buyers. We might have seen many business places in the urban areas which have been turned into markets trading in telecom and IT related products. Rates of telecom services both for fixed and mobile telephony and prices of handsets have slipped down as much as one can imagine. Tariffs of cellular mobile phone have reduced by 48% during the last one year whereas NWD call charges of PTCL have come down by 29%. Enormous employment openings were generated in the shape of direct hiring by telecom operators and franchises of these telecoms. Huge foreign investment has poured in this sector as license and royalty fees and expenditures on infrastructure development. In this project will analysis that what are the key elements which attract the FDI? What changes came in the infrastructure of telecom sector of Pakistan? How FDI in telecom sector the human life? This project we also see that trends and patterns of FDI in telecom sector.

With the current global and local political and financial situation, the telecom sector had to face tough challenges in the current year. However, being a Regulator, PTA is working diligently for the betterment of the sector so that consumers, investors and Government can all be benefited from it. Due to the reforms in the sector carried out by the Government and effective regulatory interventions of PTA signs of recovery can be seen and it is expected that during the ongoing financial year the telecom sector would perform well and stand up to the expectations of all. 

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This year PTA decided to work on following four focus areas namely Consumer Protection, Promoting ICTs, Promoting Competition and Ensuring National Security in addition to routine regulatory activities.

Foreign Direct Investment is considered an important source of economic growth in this globalized world. PTA has created a conducive and investor friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. In the last few years the telecom sector has attracted record inflows of 5.6 billion FDI in last four years. During 2007-08, a sum of US$ 1.4 billion FDI was made in telecom sector of Pakistan, which is about 30% of the total FDI in the country. During 2007-08, telecom sector ranked second after financial sector major FDI recipient in Pakistan. During 2006-07, telecom sector has received above US$ 1.824 million FDI, which was about 35% of total FDI in the country. On average telecom sector contributing 1.6% to 2.0% per year in GDP (see figure)

Telecom sector of Pakistan has shown 20% growth in its revenues by generating Rs.327.8 billion total revenues in fiscal year 2008-09 while the Government collected Rs.112 billion in the form of taxes from the sector. According to the Annual Report for year 2008-09 issued by Pakistan Telecommunication Authority (PTA), teledensity of Pakistan stood at 62% showing a growth rate of 5.4% hence sustaining positive growth trends in the sector.  The PTA report further says that in the reported period telecom sector continued to grow positively in terms of subscription, revenues and teledensity. It managed to attract US$ 815 million Foreign Direct Investment (FDI) in 2008-09. However, as most of the operators are foreign-based, the negative outlook of global economy compelled the telecom operators to limit the infrastructure expansion plans, still total investments in the sector stood at US$ 1.7 billion. During the year (2008-09) the sector contributed a total of Rs. 112 billion to national exchequer in the form of taxes whereas telecom imports also grew by 20% and reached US$ 1.6 billion. The mobile penetration reached 58.2% and total mobile subscribers reached 94.3 million with more than 90% of the country having access to mobile services. The trend in subscription remained tilted towards prepaid subscription with 98% prepaid subscriptions whereas only 2% subscribers are postpaid. Although the financial strength of mobile segment remained invariable still the cellular revenues grew by 16% and stood at Rs. 212 billion at the end of 2008-09. The mobile investments dropped by 48% and reached US$ 1.2 billion in the reported year. The industry ARPU (Average revenue per user) stands at US$ 2.48 showing a drop of 20% from last year. Major milestones achieved by PTA for mobile sector include taking up the responsibility to convince the Government of Pakistan to facilitate the sector by brining down the tax rates on telecom industry which resulted in reduction in the rate of GST from 21% to 19.5%, in addition to bringing down the activation tax by 50% while reducing the import duty on mobile handsets by 66% by cutting it down from Rs.750 to Rs.250 in budget 2008-09. Moreover, cleaning of unverified SIMs and SIM activation system now in place is expected to control the unsocial activities.

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IMPACT OF FDI ON THE GROWTH OF TELECOMMUNICATION SECTOR IN PAKISTAN

OBJECTIVES

To study the existing status of telecommunication sector in Pakistan.

To study the trends of foreign direct investments in telecommunication sector.

To examine the government’s policies for foreign direct investment and for the development of telecommunication sector.

To assess the Implication of foreign direct investment in telecom sector on general public.

To assess the Impact of FDI in telecom sector on the economy of Pakistan. Research Methodology

Methodology to attain the objectives includes, first of all, the identification of different parameters indicating the growth and development of telecommunication sector. These parameters have further been explained in terms of more specific quantitative variables. The impact of foreign direct investments on the development of Pakistan’s telecommunication sector is to been carried out by using different dependent variables and how they impact on the Independent variable. Mainly we will use the following method in order to carry see is their any impact of foreign direct investment on the growth of telecom sector.

Time-series analysis — This technique is useful for comparing the trends in the values of two variables plotted over a period of time. Accordingly, the respective figures of FDI and the selected variable have been plotted corresponding to the given years. The trends reflected have been used to make the comparison and then to draw the inferences based thereon. The time period taken for the analysis is from the year 2001 — the year the Telecom Sector boosted till 2008

Theoretical Hypothesis

In this section, we discuss several theoretical hypotheses that help to explain the FDI’s impact over the growth of Telecom Sector in Pakistan. An industry with a higher (lower) level of FDI tends to have its output share biased towards more (less) sophisticated growth of Telecom Sector. This leads to the following hypothesis:

H0: FDI does not have positive impact over the growth in Telecom Sector.H1: FDI positive impact over the growth in Telecom Sector.H0: FDI is not attracted by the Tax incentives.

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H2: FDI is attracted by the Tax incentives.H0: Development in Telecom Sector does not provide benefit to a common man.H3: Development in Telecom Sector provides benefit to a common man.H0: Growth in Telecom Sector due to FDI does not increase the GDP of the country.H4: Growth in Telecom Sector due to FDI increases the GDP of the country.

Literature Review

This section reviews the empirical studies on the relation between FDI and Growth in Telecom Sector in the Pakistan economy, which could facilitate in identifying the issues relating to the impact of FDI at the sectoral level. In early studies shows that when ever the FDI had taken part in the growth of telecom sectors it boosted this sector to the high generator of GDP of that country. The main argument of these studies was that FDI flows to Less Developing Countries (LDCs) were mainly directed towards the primary sector (Telecom & Banking), which basically promoted the less market value of the sector (Textile & other). Rodan (1961), Chenery and Strout (1966) in the early 1960s explained that foreign capital inflows have a favorable effect on the economic efficiency and growth towards the developing countries. FDI have a favorable effect on growth as it expands the economic activity. FDI is an important vehicle for the transfer of technology and knowledge and it demonstrates that it can have a long run effect on growth by generating increasing return in production via positive externalities and productive spillovers. Thus, FDI can lead to a higher growth by incorporating new inputs and techniques (Feenstra and Markusen, 1994).

When Paktel launched its services in 1990 there was a monopoly of Pakistan Telecom Company Limited PTCL, the land line phone, prevail in the country. In initial stages the users were too less that the cost of the firm could hardly be fulfilled. But as the time passed by Mobilink and then Ufone joined the race. They educate the public about the telecom sector and tried to grab more and more users in their network. After the millennium the then government attract more foreign firm to invest in Pakistan and they succeeded in their act and the telecom sector became highest contributor in the GDP. Despite the difficult time in Pakistan economy, generally the telecom sector had exhibit a positive and emerging growth in term of revenue and subscribers. In start of the millennium the teledensity in year 2003-04 was 6.25% and it jumps to 58.8% in 2007-08. The major portion that makes this sector to 58.8% is of Foreign Direct Investment in Pakistan these days. In other words Pakistan kept on relaxing investment-related policies for its telecom industry, FDI in the sector boosted up. The difference between nature of policies in early 90s and in 2000 onwards is reflected in the difference in the level of foreign direct investment in telecom, especially cellular phone, sector of Pakistan. Facts on policy reforms provided evidences that government of Pakistan is taking serious steps for the growth of Foreign Direct Investment in the country. It also witnessed that investors are given proper incentives and protection. They are considered back bone of growing economy of the country. Steps for the liberalization, privatization and deregulation of the telecom sector were specially appreciated by investors and considered as rational thinking of the current government.

The liberal FDI policy by the Government of Pakistan and deregulation and privatization of the sector has triggered a wave of international acquisitions in the sector. During the last year about US $ 2 billion worth of acquisitions were made in the telecom sector. After liberation of the sector a large number of firms are found working in Pakistan’s telecom sector. (PTA Report

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2009). Since international investors learnt it worthwhile opportunity to invest in Pakistan and especially in the telecom sector, telecom companies have invested over US $ 8 billion during the last four years in Pakistan. In 2006-07 Cellular Mobile sector has invested over US $ 2.7 billion. This sector of economy is in its boom in these days and it is generating chunk of profits for the investors and revenues for the government in the form of taxes. Pakistan Mobile industry is witnessing increasing net addition to total subscriber base for last five years. In 2006 the net addition was more than 21 million in one year showing 1.75 million average addition per month whereas in 2007 the net addition was more than 27 million increasing average addition to 2.3 million per month.Foreign Direct Investment (FDI) in Telecom

Foreign Direct Investment is considered an important source of economic growth in this globalized world. PTA has created a conducive and investor friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. In the last 2-3 years the telecom sector has attracted record inflows of FDI. During 2005-06, telecom sector received over US$ 1.8 billion FDI and emerged as the only sector of the economy to attract such huge investment where its share in total FDI crossed 54%. During 2006-07, telecom sector has received above US$ 1,824 million FDI, which was about 35% of total FDI in the country. It is expected that the trend of investment may continue in the next 5 years because large potential market still exists in Pakistan and all operators intend to grab their share. China Mobile acquired Paktel which has contracted out US$ 500 million worth of project to renowned companies like Ericsson, ZTE and Alcatel to roll out their networks. Similarly Mobilink also plan to invest US$ 500 million in 2007-08 for improving and expanding its quality of service. The telecommunication sector in Pakistan has undergone considerable transformations following the award of two new mobile licenses, FLL & WLL licenses and privatization of PTCL, the incumbent. Stiff competition among operators to grab the market share has compelled operators to roll out their infrastructure rapidly, which has created huge employment opportunities (direct and indirect). The telecom sector has vast linkages with all other sectors where it is producing large employment opportunities such as civil work for installation of towers, support service providers, SIM and handset retailers etc. Telecom sector is a major contributor in generating revenues for the Government in the form of taxes, duties and regulatory charges. To generate adequate level of revenues government is undergoing large tax reforms which include broad based tax policy and tax administrative reforms which aimed to reduce indirect taxes that are considered regressive taxes. During 2006-07 total revenue collected by the Government in the form of taxes and Regulatory fee was more than Rs. 100 billion which is about 30% higher than the last year. Indirect tax in the form of GST/CED has the major share in total government collection from telecom sector which was Rs. 26 billion in 2005-06 and its share in total was 34%. In 2006-07 Government collected Rs. 36.3 billion GST from the telecom sector and its share in total telecom taxes has increased to 36%. The increase in these government revenues are attributed to increased teledensity and increase in the usage of telephony for voice & data.

Although tremendous growth has taken place in the Pakistan telecom sector but most of it can be attributed to the cellular growth. Fixed line has been recently privatized up to 26% to total share which was taken by the Etisalat of UAE. Etisalat bought a 26 percent stake in PTCL in 2005 for $2.6 billion under an agreement that gives it management control. (http://in.reuters.com/article/companyNews/idINL0912567120070909). Even Emirates Telecommunications Corp. ETEL.AD (Etisalat) said on Sunday it was considering doubling its stake in Pakistan Telecommunications Co. (PTCA.KA: Quote, Profile, Research) to 51 percent.

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Similarly Value Added Services have grown but are still a drop in the bucket. Now that the competition has been flourished in the telecom sector, some very positive impact have been observed on the growth of the sector in a short span of time which is expected to continue to grow for at least next five years if the daring investors influx continue as in the last 3 years. (PTA Industry Analysis Report 2007). Facts on policy reforms provided evidences that government of Pakistan is taking serious steps for the growth of Foreign Direct Investment in the country. It also witnessed that investors are given proper incentives and protection. They are considered back bone of growing economy of the country. Steps for the liberalization, privatization and deregulation of the telecom sector were specially appreciated by investors and considered as rational thinking of the current government. The liberal FDI policy by the Government of Pakistan and deregulation and privatization of the sector has triggered a wave of international acquisitions in the sector. During the last year about US $ 2 billion worth of acquisitions were made in the telecom sector. After liberation of the sector a large number of firms are found working in Pakistan’s telecom sector. (International-business-articles)

It is worth mentioning that countries such as Bangladesh, Pakistan and Sri Lanka do not have FDI restrictions. The security concerns of Pakistan and India’s are on a different level. Pakistan has security concerns visa-a-vis India. Irrespective of FDI limits, Indian companies cannot own companies in Pakistan. India’s security concerns are much wider. Therefore equating Pakistan and India on this score is an unfortunate comparison. Pakistan allows 100% FDI to start with; this proportion has to be reduced to 60% within a stipulated time period. (Finance Ministry’s Note on FDI on telecom)

FDI FLOW

It is necessary to understand the key factors influencing the flow of FDI globally. According to the United Nations Conference on Trade and Development (UNCTAD) report for 1998, the quantum of annual flow of FDI has reached US$ 450 billion. Traditional determinants of FDI are still key to attracting the investment. The size and growth of domestic market, geographical proximity and access to key potential markets, including large regional markets, play the key role. At the same time, the existence of created assets is of mounting significance as a magnet for FDI inflows, especially from major transnational corporations (TNCs). According to the UNCTAD secretary general, "The challenge (for governments) is precisely to develop a well balanced and preferably unique combination of determinants of FDI location, and to seek to match those determinants with the strategies, pursued by competitiveness-enhancing TNCs." As the search in foreign countries for 'created assets' become more important to a firm's competitiveness, countries without traditional advantages — natural resources or large domestic markets — can be more competitive in attracting FDI. Costa Rica created the conditions and people-made assets, including skilled labour. This resulted in attracting a US$ 500 million investment for project from Intel Corporation in 1997.

FDI in Pakistan

FDI has been instrumental in the development of the country. The presence of foreign companies in Pakistan predates the inception of country. To quote a few examples, Shell started operations in the area in 1903. Imperial Chemical Industries (ICI) established soda ash manufacturing unit in 1942. ANZ Grindlays Bank and Standard Chartered Bank were working in these areas before independence. Currently about 250 foreign companies are operating in the country. They have

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interest in almost each and every sector. These include pharmaceuticals and chemicals, oil and gas exploration and marketing, power generation, food and beverages, automotive assembly, insurance and banking etc.According to a large number of analysts, no foreign company, which entered Pakistan, has ever left the country; rather they have been expanding their operations through expansion and diversification. Not only was that, even at the time of nationalization, all the foreign investment exempted from the preview of nationalization. Whereas in many countries foreign investment has been the first to be nationalized. Pakistan was among the first few countries in the region to open up the market in early nineties. Now the foreign investors can virtually invest in any sector except a few. Opening up of market and initiation of process of privatization made Pakistan a center of attraction. Foreign investment came in large volume, both as FDI and as portfolio funds. The FDI inflow to Pakistan in 1992-93 was US$ 307 million and exceeded US$ one billion in 1995-96. However, since then, it has been registering a constant downward trend. But even during this period foreign investment has continued to come in projects like ICI Pakistan's PTA plant, Engro Paktank and Engro Asahi polymer — to name a few.

According to the chiefs of some of the multinational companies (MNCs) Pakistan still offers unmatchable economic fundamentals but the way the government of Pakistan (GOP) has treated the foreign investors in last two years is a source of serious concern. Blowing the independent power plants (IPPs) issue out of proportion and unnecessary harassment to employees of these plants and lending institutions (employees of NDFC in particular) has damaged the credibility of GoP. Instead of making WAPDA and KESC financially strong by cutting down the T&D losses, improving their recovery of outstanding dues and making their overall management efficient, IPPs were blamed for all their miseries. They also say that energy sector had introduced Pakistan to global investors. Not only investment in the sector came in but many other sectors received large investment. Further investment was expected through privatization of WAPDA and KESC and the sale of remaining 64 per cent shares of KAPCO but tussle with IPPs put an end to all this. Still the GoP has not realized the reality and continues to offend the lenders. The steps which have caused serious concerns to multilateral lenders in constant disregard to their submissions. The outcome is that negotiations with lenders are getting tougher.

Model: Strategies to Attract FDI in Telecom Sector

To attract FDI is most important especially in emerging markets like Pakistan. Here government had taken wide steps to attract foreign investors to invest in Pakistan especially in Energy and Telecom Sector and the government had succeeded in this act as in year 2003 about in 9 months Pakistan had $322 Million of investment that was made by the foreign investors. This shows that Government had worked at their best in the past to promote FDI in Pakistan. However, in recent year Pakistan has decreasing rate of FDI because of the change in Government, imposing of additional Tax over employers, Financial Crisis, Civil War in Pakistan, Lack of Security e.t.c. But still investors see some profit taking in future years, as the Stock Exchange although being financial crisis jumped from 5000 index to 9000 index. This is a positive sign for the investors that there are still some benefits by investing in Pakistan.

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Dependent Variable Independent Variable

Economic Stability

Political Stability

Attracting FDI in Telecom Tax Incentives

Market Potential

Skilled development

Result & Discussions

In our model of attracting FDI in telecom the factors that influence directly on this are political & economic stability, tax incentives or tax exemptions that are subsidized by the government, the market potential and the labour cost of that country. In the country like Pakistan, it is not very easy to attract the foreign direct investment but this is the emerging market and it gives a lot of benefits to the investors. We can attract the FDI with our independent variables in this developing country. How these independent variables can contribute in affecting the dependent variable is discussed as under:

Economic Stability: A sound and stable macroeconomic environment resulting from the factors e.g., the non-volatile exchange rates, adequate reserves, price stability and favorable fiscal balance promise healthy and risk-free returns on investments. As economic fundamentals have not been moving in the right direction since last many years, these have forced the foreign investors to adopt a cautious approach towards investment in Pakistan. The economy needs to be stable and growing at a pace consistent with the standards and norms of the high FDI absorbing economies among the developing nations.

Political stability: In Pakistan here always remains the issue of this political stability. When ever a government changes it cancelled all the deals of the previous government and implement its own decisions and plans. A stable environment is very much essential for accurate forecasting about the future risks and returns for the MNCs. Time and again, the country has been plagued by political instability resulting from the military takeovers and dismissal of the governments. This has badly shaken the confidence of investors from abroad and suppressed the potential inflows of the FDI. A stable political environment needs to be provided to foreign investors in Pakistan to convince them in context of safe and secure returns.

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Tax Incentives : Low corporate taxes are important to increase the profitability of the FDI. If government provides some exemptions in tax like decrease in tax rate, no payment of tax in first 2 years, 50% of net income may be exempted from tax etc. Normally the companies always try their best to avoid the payment of tax to the government and when they sees that the government itself is providing some incentives in the tax or any relief is given by the government, this attract the investors to a huge extent as this will increase the profit margin of their business.

Market Potential: The potential of the market to have demand of the product attract more investors in the market. A high FDI stock in the past in a particular industry can be seen as a signal to potential foreign investors.

Skill development: There has to be an expansion of education and development of skills as a part of proactive strategy, anticipating the future needs. Emphasis needs to be placed on the science and information technology (IT) education. Training and development of the student to be a skilled person is necessary. The investor tries to invest in those areas where he may easily get the professionals as well as the other skilled labour. This reduces the cost of hiring of the investor.

The assumption of less fluctuation in inflation rate of the country is being made in order to have the impact of the independent variables over the dependent variables. This assumption is made as with high inflation rate the demand decreases in the market and the demand for the necessities remains. When there will be less or no demand for the product the foreign investment will no likely to occur. Although the above variables are tested by the researchers in Pakistan as well as in other developing countries and all the results got were positive. There are also the reasons Why Invest in Pakistan. These are as under:

Why Invest In Pakistan: Government is now following a transparent policy and is doing all deals in an open way right from advertisement of opportunities till closure of deals. Key Reasons to Invest In Pakistan

Strategically Located

Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced Far Eastern tigers. This strategic advantage alone makes Pakistan a marketplace teeming with possibilities.

Suitable Workforce

Here the people are mostly English proficient, hardworking and intelligent. They have ... lesser costs.

Economic Outlook

Pakistan is one of the fastest growing economies of the world having touched a GDP growth rate of 8.4% in 2005. Today Pakistan has 16.0 millions consumers with an ever growing middle

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class. Foreign investment has risen sharply from an average of $400 million in the 1990s to over $ 3.5 billion in 2005-06. Fiscal deficit has declined from an average 7% of GDP in the 1990s to around 3% in recent years. And FOREX reserves have increased from $3.22 billion in 2000-1 to $13.14 billion in 2005-6.

Policies

Current investment policies have been tailor made to suit investor needs. Pakistan’s policy trends have been consistent, with liberalization, de-regulation, Privatization, and facilitation being its foremost cornerstones.

Financial Markets

The capital markets are being modernized, and reforms have resulted in development of infrastructure in the stock exchanges of the country. The Securities and Exchange Commission has improved the regulatory environment of the stock exchanges, corporate bond market and the leasing sector. Whilst the Central Board of Revenue has facilitated structural reform in tax and tariffs and the State Bank of Pakistan has invigorated the banking sector into high returns on investment.

There is a great need for Pakistan to place itself at the right place to emerge as a strong candidate for the FDI among the developing countries. The economy needs to regulate the diet-mix being taken at present. The FDI is good cholesterol for the economy. The BoI (Board of Investment) can play a powerful role not only in attracting the FDI but also towards benefiting the national economy from such investments. Pakistan provides relatively strong protection for foreign investors; it ranks 19th worldwide on protecting investors, according to World Bank report Doing Business in South Asia 2007. Total foreign investment for the financial year 2006-2007 i.e., from 1st July 2006 to 30th June 2007 is $ 8.4 billion, 88% more than the amount ($ 4.5 billion) during the same period last year. This clearly shows that foreign investors are attracted towards Pakistani markets. Many companies and groups like Abu Dhabi Group, NAMA Investment, and Orascom have done mega investments in Pakistan in last year.

Having evaluated the country risks and the business environment there are many companies who are moving towards venture capitalism and are offering acquisition proposals to traditional business houses in Pakistan. There are excellent opportunities to partner with local financial name if you have technical expertise and feel that Pakistan due to its cheap labor and excellent investment policies is right for you. The companies here have a structured approach towards investment. There are certain sectors that have been identified as golden sectors. These are Power generation, Cement Manufacturing, Steel Mills, Naphtha Crackers, Fertilizer Factories and Coal Mining.

Data Analysis:

If we see the annex we may analyze that Telecom Sector has contributed in GDP of Pakistan economy to an increasing rate. If we compare the data of recent 5 years we may see that in year 2001 it contributed about 1.6 % in total GDP of 2001 and it was 2.0 in 2005-06. This shows that

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Telecom has boosted up the GDP of Pakistan and this is all due to the Foreign Investment in this sector. Also we have analyzed the Tax that is being collected from this sector. As when this sector was booming up in early this century i.e. in 2001, about 8.9 Billion of revenue had been collected as Tax revenue from this sector. It is also noted that in 2001 there was still some monopoly of Land line or Basic Telephony but as the time passed on the subscribers of Mobile roused and it increases the tax revenue by the time then basic telephony. In year 2004-05 Mobile telecom has generated about 0.2 billion more tax revenue for the govt of Pakistan then the basic telephony and it increased year by year. Other then the above analysis if we see the FDI that came in Telecom Sector as compare with the Total FDI we analyzed that as the year passes Telecom Sector has generated more and more FDI as compare to other sectors. As in 2001-02 only 1.26% of Total FDI has came in Telecom Sector but in year 2005-06 more than 50% of Total FDI had come in this sector which shows the huge scope of investment in this sector. After 2005-06 we see some decline in FDI in this sector this is due to prevailing high competition and high economies of scale has already been achieved so the new investor were more cautioned to invest in Pakistan in this sector rather they prefer to invest in other sectors like energy sector.

Telecom Economic Indicators Last Updated ( Monday, 23 November 2009 ) Telecom Sector share in GDP (%) GST / CED Collection from Telecom Sector Foreign Direct Investment In Telecom Sector Tele density (Fixed + Mobile)

Telecom Sector share in GDP (%)

Years %age share of GDP

2000-01 1.62001-02 1.62002-03 1.72003-04 1.72004-05 1.92005-06 2.0

GST/CED Collection from Telecom Sector(Rs. in billion)

  2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 

Mobile 2.0 3.3 5.2 9.9 18.8 28.2 36.80Basic Telephony* 6.9 8.2 6.9 9.7 7.7 7.9 6.80Others** - - - 0.9 0.3 0.2 0.93Total 8.9 11.5 12.1 20.5 26.8 36.3 44.53

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**Others include WLL/ LDI operators

Foreign Direct Investment in Telecom Sector (US $ million)

Years Total FDIFDI in Telecom

SectorContribution in Total FDI (%)

2001-02 484.7 6.1 1.262002-03 798 13.5 1.692003-04 979.9 207.1 21.132004-05 1524 494.4 32.442005-06 3521.0 1905.1 54.112006-07 5124.9 1824.3 35.602007-08 5152.80 1438.60 27.92

Teledensity: Telecommunications penetration expressed as a percentage of population. Despite the difficult time in Pakistan economy, generally the telecom sector exhibit positive but slow growth in term of revenue, subscribers and teledensity. Teledensity of the country is increasing at every stage which shows growth of telecom sector. Looking through year 2001 to 2004 teledensity was increasing by 2 to 3 percent but after these years it increased by the high velocity of 5 15 20 percent and so on. This shows that this sector has gone to its boom and still it is the high revenue generating sector then all other sectors in Pakistan. In recent period of time this density is increasing by 0.4 to 0.2 percent and even in teledensity for the month of Oct 09 remains same as of in Sep 09. This shows that there in no change in the subscribers or very low increase in subscribers in the current year.

Teledensity (Fixed + WLL + Mobile)

Years Total Teledensity (%)   

2000-01 2.80  2001-02 3.66  2002-03 4.31  2003-04 6.25  2004-05 11.89  2005-06 26.26  2006-07 44.06  2007-08 58.902008-09 62.0

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IMPACT OF FDI ON THE GROWTH OF TELECOMMUNICATION SECTOR IN PAKISTAN

July-09 62.3Aug-09 62.3Sep-09 62.4Oct-09 62.4*FLL Teledensity RevisedNote: Including AJK & NAsFLL Teledensity As of Mar 09

Conclusion:

The paper identifies the determinants of FDI’s impact over the growth of Telecom Sector in Pakistan over the period 2001-2007. The purpose of this paper was, first, to provide information on the FDI that had come in Pakistan in the sector of Telecom. Secondly the goal is to attract additional FDI and to provide insight on the scope of FDI that can be attracted if a best practice policy is implemented. All the above three inferences suggest that foreign direct investment in Pakistan has led to the development of the Pakistan telecommunication sector particularly after 2001.Pakistan also has great potential for attracting more investment from abroad and encouraging more private investment at home especially in Telecom Sector.

References:

In this project we collect the data from secondary data sources which are as follows:

Silvio Contessi.2004. FDI in the Telecommunication Sector of Transition and Developing Countries(Puebla, 2004)

John Ure. 2004. FDI in Telecommunications Services in Asia. Ritsumeikan University, Kyoto, 2-4 March 2004.

Seema ansari and arshi khan. 2009. Telecommunication trends in Pakistan available at http://www.pafkiet.edu.pk/LinkClick.aspx.

Rahul mukherji. 2006. Promoting foreign investment in India’s telecommunications sector. Institute of south Asian studies.

Industry Analysis Report 22007, 2008 and 2009, published by Pakistan telecommunication authority.

Economic Survey of Pakistan (sectors performance) at is available on the webpage of ministry of finance.

Ali Salman. 2007. Telecom Liberalization in Pakistan: Implications for a Common Man. It available at http://freedomgatepakistan.org/arielsportsperformance/images/File/Publications/Telecom%20Study.pdf

Economic indicator of telecommunication industry , it is available at http://www.pta.gov.pk/index.php

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IMPACT OF FDI ON THE GROWTH OF TELECOMMUNICATION SECTOR IN PAKISTAN

Pakistan Telecommunication Authority (PTA). 2007. Foreign Direct Investment Policy for Telecom Sector. Available: www.pta.gov.pk.

Annual report of Pakistan telecommunication authority. Available: www.pta.gov.pk

Telecommunication statistic. Pakistan Statistical Year Book 2008. Available http://www.statpak.gov.pk/depts/fbs/publications/ yearbook2008/yearbook2008.html

Attracting FDI available in the websites: http://in.reuters.com/article/companyNews/idINL0912567120070909 & http://www.articlesbase.com/international-business-articles/foreign-direct-investment-in-telecommunication-in-pakistan-920918.html

Some general results available in Finance Ministry’s Note on FDI on Telecom

Sridhar, Kala Seetharam and Sridhar, Varadharajan. “Telecommunications infrastructure and economic growth: Evidence from developing countries.” Applied Econometrics and International Development, Vol. 7-2 (2007)

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