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Making joint ventures compulsory for foreign firms


1/21/2019
IN a policy shift, the PTI-led government has decided to shepherd foreign firms into joint ventures.
 
“The government has made it mandatory for all foreign firms to invest in joint ventures with Pakistani firms so that the local companies could also get a boost, and deal with local issues in a better way,” Board of Investment (BOI) Chairman Haroon Sharif informed the second meeting on ease of doing business on Jan 9 in Islamabad.
 
Currently, the government allows 100 per cent foreign equity with no minimum or upper limit. Foreign firms are also accorded the same treatment as local capital.
 
Foreign firms have set up both private and public limited companies with majority shareholdings and control. Those listed with the bourse have offered their stocks to minority shareholders or entered into joint ventures with Pakistani partners. Some company managements, however, buy back their shares from minority shareholders to maximise their needed returns.
 
It is not known if the government intends to prescribe a maximum foreign shareholding limit in a joint venture or allow the co-sponsors to decide upon an equity ratio to suit their mutual convenience. However, Finance Minister Asad Umar told businesspersons in Karachi that the second mini-budget, due on Jan 23, will have some good news for the stock market.
 
In view of the experience gained through CPEC projects, it will also be advisable to maximise the use of local skilled and unskilled labour, raw materials, equipments and domestic bank financing to reduce the import component as far as is feasible.
 
Dwelling on the routes which foreign firms could take in setting up joint ventures in Pakistan, a sort of informative ‘advisory’ by the US Commerce Department says: Firms wanting to delay entry into the Pakistani market could consider licensing arrangements with local firms and see whether the initial response is promising.
 
Encompassing 75 countries including Pakistan, a US report published on June 9, 2018 mark joint ventures as an attractive option because: ‘Local entrepreneurs who may have built a substantial market base seek to combine their knowledge with foreign capital and technological know-how.’
 
The government’s joint venture mandate is in keeping with the emerging global market trend. International joint ventures ‘continue to proliferate, stepping into an age of alliance capitalism,’ says a recent working paper , prepared by the Centre of Excellence Pakistan-China Corridor, Ministry of Planning, on ‘Joint ventures under CPEC: Prospects for Pakistan’s industry’.
 
This trend is also borne out by Foreign Direct Investment reported in 57 new firms out of a total of 1,130 registered with the Security and Exchange Commission of Pakistan in December 2018.
 
In view of Pakistan’s latest comparative advantage, the official study says joint ventures — such as in textiles, leather, chemicals, pharmaceuticals, food processing, agro-based products — can be a tool to uplift the economy.
 
According to the BOI, quite a few countries are interested in investing in Pakistan: Saudi Arabia in oil refinery, petrochemicals, renewable energy and mining, with a memorandum of understanding for investment of over $10 billion expected to be signed this month. The UAE is interested in housing and agriculture. A team of Malaysian firms, due this month, would like to invest in production of halal meat, gemstones, IT and high-tech education.
 
Foreign firms, interested in such a wide range of sectors, may not find it easy to locate the right local joint ventures partners. The BoI could probably draw up a list of Pakistani companies with their profiles and brief project descriptions and arrange a matchmaking discourse between potential local and foreign investment partners.
 
Special economic zones that are to be built along CPEC will offer one-window facility for investors to reduce red tape. The government has also decided to set up ease of doing business offices, both at the federal and provincial levels, to facilitate smooth business operations.
 
The reduction of taxes on investment along with numerous measures to cut the cost of doing business are proposed to be announced in the next mini-budget later this month following intensive consultations with trade bodies.
 
These measures have been preceded by short-term financial support provided by friendly countries to build the country’s foreign exchange reserves. It remains to be seen, however, how much the mini-budget responds to the expectation of the business community.
 
Source: Dawn